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
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