Tesla has now dropped 35% this year, ahead of even Boeing, which seems to have several safety incidents a week right now (have to fly in one on the weekend, wish me luck!)
There’s two issues.
Demand
The first is simple - competition from BYD and a slowing electric vehicle market have caused mid-term sales and earnings forecasts to plummet.
This was well-flagged last year when Tesla cut prices across their line-up multiple times.
I’ve always had a dim view of competition from traditional automakers, and that has certainly played out.
It makes no sense to buy an electric car from most car makers, and certainly not to pay a premium to do so.
And the ability to charge that premium is where all the value is.
Most of the market is highly commoditised, and automakers (for good reason) have converged on the same shapes and features. Sedans and mid-sized SUVs all look the same.
Worse, and to no-one’s surprise except those implementing those policies, mass Government subsidies have resulted in large numbers of expensive vehicles that noone wants.
Ford is apparently losing $35,000 on every F-150 Lightning and has only sold 24,000 (out of a US market of 14 million cars). This is a ute designed for journalists and politicians, not tradies.
And BYD now has a lock on the Chinese market, which has decided to focus on Chinese-made cars (and phones actually). Until now, Tesla was one of the most successful companies in China.
A similar story is playing out with Apple, which like Tesla, charged a premium price in a sea of generic competition, was highly favoured by Chinese consumers, but is now suffering from a saturated global market, worsened by the Chinese shifting en masse to domestic-made phones.
This has led to dramatically falling earnings forecasts.
Flagship orders from large buyers have soured, with rental companies flogging Tesla’s on the second hand market as they proved too expensive to repair, and the surprisingly fast acceleration led to more front-end collisions.
Tesla’s success was unimaginable only a short period ago. Last year they had the best-selling car of any model last year globally, and not by undercutting on price.
Tesla sold 1.23 million Model Ys globally, out of a total market of ~85 million (including other models, Tesla sold 1.8 million vehicles).
But this success does raise the question, where to from here?
The company is GAAP profitable ($15 billion in 2023), but at a market cap of over $500 billion, is still priced off future success rather than their size today.
Second issue
Which brings us to the second issue. A bullish take on Tesla requires the firm to succeed in adjacent markets: self-driving technology, AI, energy, and so on.
But there’s a problem: Elon has put his large language model efforts under x.ai rather than under Tesla, and much of his effort is centered on ventures outside the company.
This is partly due to the bizarre hostility he faces from the left, whose favourite cause of environmentalism he has done more than any person alive to improve (he claimed this at a conference recently, but it is true).
And a court recently ruled that the shares he was awarded for hitting highly ambitious sales targets and 10x-ing the company’s stock price should be forfeited.
I remember when these targets were announced. They seemed crazily ambitious, but somehow he hit every single one. I suspect this will be resolved in his way one way or another, but it’s certainly a dampener.
Positive surprises
There are two near term surprises that could turn things around.
Firstly, he is rolling out FSD 12, the first self-driving technology that was developed entirely with AI and machine learning, converting visual input into a small set of controls, rather than trying to code for every situation.
This is priced richly at US$1,000/month, but earning $12,000/year off his multimillion car installed base (which will be over five million in the near term) would drive significant value.
Secondly, having seen it in person, I’ve completely changed my view on the Cybertruck. It packs more visual punch than any other car on the road.
This is the first time I’ve ever stopped to look at a car. I even took a photo, as did many around me, and this was in San Francisco where presumably this is a more common sight than in Sydney.
The first time you see it, whatever you think right now, I’m sure you’ll agree: this is going to sell.
There are 1.9 million preorders, and while these can be easily cancelled, that’s a very large number in the context of the global auto market. Evidence these are being fulfilled could also drive a step-change up in value in the near term.
Even if Tesla misses the 16 million deliveries currently forecast over the next five years, their installed base is likely to grow several times over from where it is today. And even if their self-driving module is priced much cheaper than it is today, that represents immense latent value.
What needs to happen
Tesla’s board needs to double down on their successful approach to compensation, which was the most shareholder friendly package I’ve personally ever seen.
We’d happily see every CEO compensated richly if, and only if, their stock went up ten-fold and they hit ambitious revenue and profitability targets.
They should implement a similar plan again.
And the only way Elon could hit similar targets from a much larger base today, would be to win decisively in AI.
He was a cofounder of OpenAI after all, the glorious details of which will soon become public, if he proceed with his lawsuit against the other founders.
[This will be another fascinating episode, as if companies are allowed to start as non-profits with all the associated tax advantages, then pivot to for-profit if slash when they achieve product market fit, well, then everyone will do it.]
Victory in AI would certainly justify another historic equity grant, no doubt issued under a steadier jurisdiction than Delaware.
But as we stand today, with the courts trying to confiscate his prior award, and open hostility from the Biden administration who is suing him to the point of absurdity, Tesla is hardly a priority.
And certainly a secondary focus to SpaceX, which now offers blazingly fast satellite internet anywhere on the planet. And perhaps even tertiary to his focus on twitter/X and his large language model work in x.ai.
Until these issues are resolved, Elon’s best efforts in AI return to Tesla, and he can be incentivised without the risk of judicial compensation confiscation, the shares will stay under pressure.
Tesla’s board should give Elon what he wants - a headline grabbing award conditional on another set of extraordinarily ambitious targets that would only be possible with his best work for the company, rather than outside it.
That would certainly get the stock moving, and back to the other end of the return-charts where it belongs.
PS: We don’t own any Tesla now, but you should have a decent idea now of the circumstances under which we’d buy back in.
