4 "C"s of Tesla!

I have a written few blog posts about Tesla while it was still a small company with a market cap of less than $10B (unfortunately, I did not follow my own advice of owning the stock instead of or in addition to the car; as the saying goes, hindsight is 20/20). Now that Tesla is a much bigger company (with a market cap equal to or greater than all the other car companies in the world combined), it's time to take another look at the company and the stock. So here it goes.

$TSLA reached a 52 week low this week despite very optimistic "pedal to the metal" projections from Elon Musk. After touching a $1 trillion valuation, it has been sliding down (call it the trillion dollar curse, similar to what Meta also experienced – but that's another blog topic) and lost over 40% in 2022. What's impacting Tesla and its stock? There are 4 "C"s which will decide what's next for the company.

Competition:

It used to be EV + Autonomous Driving + Cool Factor = Tesla just a few years back. There were hardly any other EV choices. The big car companies saw the writing on the wall and finally woke up, and now almost every one of them has at least one all-electric model (Ford F150, VW iD4, and so on) in the market or will have one very soon. With California's mandate of only EV sales by 2035, this decade will see at least 50-100 choices when it comes to EVs in all price ranges. While Tesla will probably still keep its leading position, other car companies may see decent success (they have to for survival). Also, watch out for Japanese car companies like Toyota and Honda; they have trusted brands and reputations for reliability at affordable prices. Tesla could see a similar trajectory as what Netflix saw in streaming market when competition from existing studios like Disney arrived...

Car Industry:

Tesla is, after all, in the car industry, which is known for its enormous capital needs, low gross margins, and intense competition. While Tesla is also a tech company, I estimate that its products have an average turnover of about 10-15 years (unlike mobile phones which is 2-4 years). That's why the average P/E multiples in the car industry hover around 10. Eventually the large numbers and the structure of the car industry will catch up with Tesla valuation and its P/E would get compressed from a tech industry valuation to a car industry valuation.

China:

Tesla deserved credit for its excellent success in China's EV market – for manufacturing cars as well as grabbing a large market share in the premium EV market despite intense competition from Chinese EV players like NIO and XPeng. But relations between USA and China have further worsened during the Biden administration. With the Taiwan flashpoint and US efforts to prevent China from getting ahead in key industries, it's just matter of time before tensions reach a breaking point. Xi will be China's leader for at least the next 10 years, and given how China's own companies (such as Alibaba, Tencent, etc.) have been cut to size, Tesla, being a US company, may be in danger of the same. Imagine what would happen if China decides to apply the brakes on Tesla's ambitions...

CEO:

Tesla = Elon Musk. Period. He saved the company from bankruptcy and became richest person in the world due to Tesla's success. Without Elon Musk, we would not have Tesla in its current form. But even Elon Musk cannot change the first three "C"s. And his recent digressions into social networking with the Twitter deal will have a direct impact on Tesla. During a recent conference call, he tried to pump up the stock (Elon said that Tesla would be bigger than Apple and Saudi Aramco combined - which would be $4.3 trillion valuation), but markets did not like what they saw in the results. Also a CEO pumping their company's stock is never good.

So these are the 4 "C"s. I used to recommend buying Tesla stock instead of the car. Now I would say treat yourself to a new car and watch out how these "C"s play out before buying the stock!

Happy Diwali to all!

/Shyam

October: Markets and Festivals!

After long hiatus due to personal reasons, it's time to get back to blogging. And what better day to start than on first day after historically worst month for markets. This year was no different. Sept kept to its reputation as worst month with markets ending at lowest point for 2022 (S&P down by 25% and Nasdaq by 32%). This week saw the leaders (like Apple etc) taking the hit...that may be an indication that markets may be getting closer to bottom...now that we are in Oct which had the reputation of having worst crashes, we may get one or two big crashes...that would be clear sign of market bottom. As they say "Don't fight the Fed" - that holds true in both directions. Fed is determined to get back it's credibility and will not (and should not) pause interest rate hikes till inflation indicators show clear downward trend....It's possible that Fed may do more than needed and damage the economy at least for short run...Economists, companies and policy makers are already preparing for recession in 2023 (if we are not already in recession). Question is - would it be shallow like 2020 or multi-quarter like 2008-2009? 

All indicators are pointing to markets playing out like 2008-2009. At that time, the volatility was much higher due to potential of complete meltdown of financial system. This time banks are in much better shape...so this may be a combination of 2008-09 and 2001-02. High tech valuations are getting compressed but other sectors like Energy are holding up well.

Last year every company was talking about supply chain issues preventing them from filling the orders and booking the revenues. If Nike's announcement is any indication, this earning season would be about too many goods and inventory glut leading to write-offs. So much about just-in-time and efficient supply chain management. Fortunately companies have not started mass layoffs.  Employment in US is still holding strong...even now it's still very difficult to fill positions with qualified candidates even at significantly higher compensation. Would that change? Possibly given initial announcements from mid-size companies (DOCU, TWLO) to bigger companies (10% cost cutting by Meta and 20% productivity improvement by Google are indicators)

So what's in store for last quarter of 2022? Now-a-days making predictions has become a fool's game. But let me still take a swag at it. 

• Fed will raise interest rates by 50-75 basis points in Nov and 50 basis points in Dec and give an indication that they would monitor the economic indicators before further hikes. No rate cuts in 2023 unless economy enters into severe recession and inflation fears turn into deflation talks...For now inflation would start inching towards 6-7% by year end with downward trend.
• Corporate earnings would be better than feared but companies would be extra cautious in their projections for Q4 and point to recessionary pressures and high costs (especially labor)
• Holiday shopping season would be reasonably good...people would be traveling and spending money. However travel sector (cruise companies etc) would continue to suffer due to capital structure (too much debt at very high rates)
• Elections: Dems would keep the senate (50-50) and may lose house majority with small margin
• After volatile October, markets would stabilize post elections with S&P ending the year between 4000-4200 (10-15% higher from current levels)

October is also festive season across the world. Jewish celebrating Yom Kippur, Hindus celebrating Navratri/Dussera and Diwali and then there is Octoberfest in Germany and around the world.

This quarter also has many sporting events - Cricket T20 World Cup, Soccer World Cup and in US, NFL and College Football keep weekends exciting (first time I am playing NFL fantasy football with my son and his friends..it definitely makes watching games more interesting). So for rest of 2022, forget about what's happening in markets and enjoy festivals with family and friends, sports, movies or just a walk in the park with colorful foliage!

/Shyam