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Tesla, Inc. 🇧🇷NASDAQ:TSLA) is a stock I had no interest in during the Covid bubble. Finally that is changing. As the stock price plummets and profits rise, it finally becomes a company you can fundamentally value. I detailed this in my December 15th piece. titled: “With a future P/E of 28, is Tesla now a value stock?”
With the price continuing to drop, we are now at a futures multiple of around 22-23x, for the fiscal period ending December 2023. After that, we are in for a gasp! – multiple teens for what was once the poster child for the Covid craze.
Of course, the rebuttals to what I just said will be things like BMW (OTCPK:BMWYY) trades at a P/E of 4x, or that even the best Toyota(TM) is 10x. I started to learn more than 20 years ago that investing based on exclusively at low P/E also led to low returns.
Since selling my business, I live entirely on my investments, so yes, I have a lot of higher yielding stocks from low to no growth. This is how I rate existing automakers, and frankly I feel there are better risk/reward industries for this type of investment. Instead of these debt-ridden, pension-ridden ICE (internal combustion engine) manufacturers who now have to cannibalize those sales with their money-losing EVs (electric vehicles).
If you disagree, just look at the history of several decades. YCharts won’t let me generate this for 20 or 30 years, but believe me, this underperformance is just as ugly. If they couldn’t deliver alpha during the 100% ICE days, how will they do it during the secular transition to EV?
You shouldn’t expect Tesla to trade at an earnings multiple comparable to legacy automakers. In short, here’s why:
- Tesla has been an EV company from the beginning. They’re not going through ICE’s messy manufacturing transition.
- Tesla, being a fully EV company, receives regulatory credits for free. They have a surplus. Meanwhile, nearly every other automaker has a deficit, so they have to buy credits from Tesla and others in order to offset their ICE sales.
- Tesla eliminated the middleman; the dealership. It’s true that margins on new vehicle sales are slim for dealers. Still, it’s more money for Tesla.
- Tesla is not drowning in debt and pension obligations. In fact, they have cash. Yes, a large part of the automakers’ debt comes from financing the purchase of vehicles. However, contrary to the consensus, this is a higher risk debt. How many people do you know who are losing their minds over a fancy new car or truck, regarding job security and income in a boom and bust economy?
- Tesla has technological superiority. I understand that some facets of this leadership are debatable, but on the whole, even the naysayers agree that it’s true.
- Tesla has other bets, such as those related to the FSD. If this and other gambles succeed, even if they fall far short of Cathie Wood’s projections, it would still mean a huge increase in revenue. The same cannot be said about the biggest automakers out there.
If sales are so good, why the 12% discount?
tesla
The $7,500 discount equates to over 12% on Model 3 above. That’s a lot for a company that doesn’t normally offer discounts!
To be clear, they are not offering a fixed percentage discount as the realized percentage varies based on the purchase price.
So why $7,500?
Because of the Inflation Reduction Act, a misnamed law if there ever was one. Includes a $7,500 tax credit for electric vehicles. Not just for any EV, though. It stipulates where not only cars are assembled, but also their batteries and where their materials are sourced. Must be North America or no credit.
Previously, it didn’t matter where cars were made or how much they cost. Even the Bentley hybrid SUV qualified. Due to the limit of 200,000 vehicles per manufacturer, Tesla sales have not been eligible for some time.
That all changes on January 1st, as the manufacturer limit is being lifted. Again, people who can afford an $80,000 car are also getting a $7,500 tax credit to reduce inflation?! Well, regardless of that logic, it’s great news for Tesla.
Not so much, though, if you were buying a Tesla this month, or really any time since the legislation was passed in August. If your adjusted gross income is <$150,000 ($300,000 for joint filers), you basically save $7,500 by waiting until January 1st to take ownership of your new car.
With this, it is clear that the domestic inventory was increasing in the fourth quarter. Is it any wonder why Tesla decided to match the next tax credit to move that stock now?
If the stock price didn’t fall off a cliff, they probably would have waited. They started at a discount of $3,750 on December 1st. With a nearly 30% drop since then, it’s understandable why they’ve risen to $7,500. They know they need blown delivery numbers for the quarter to hopefully reverse the trend.
Discount on some sales versus all sales
How much will the $3,750 to $7,500 lower the average selling price of the Models 3 and Y?
Maybe not much.
They basically waited until the last minute of the year to cash in, despite the 2023 credit being known since August. The question is how many people have since put off buying, we don’t know.
Given the income threshold, for some the next credit didn’t matter as they didn’t qualify. For them, it actually made sense to buy one now from stock, even if it wasn’t the exact color and features they wanted, because it would be $7,500 off until December 31st.
I’m in Los Angeles and I got the text:
from the phone itself
Yes, I had to tell the so-called Trevor to stop. This is Tesla’s general text number for deliveries and more, not a personal line. It’s automated marketing copy made to sound personal.
I went to Tesla’s website that morning and only saw a few dozen cars within a 50 mile radius. When I checked a day later for the purpose of this article, on Friday the 23rd, there were ZERO cars available within a 200 mile radius of Los Angeles.
I found some all over the country within 200 miles of random zip codes, but on Christmas Eve morning I couldn’t find any.
When they were available, they were all the higher cost packages. Nothing close to the base models was being discounted at $7,500.
That said, on Christmas Day, I stopped by their store in Long Beach. This is one of their few actual stores (not just showrooms) in Los Angeles. The parking lot was full but there was no stock for purchase, not sure of the explanation.
The takeaway?
Tesla likely cleared inventory. Yes, discounted, but it should bode well for Q4 deliveries domestically.
China, on the other hand, remains a wildcard. They stopped production in Shanghai a little earlier, on the 24th, as part of their planned holiday at the end of the year. This has not happened before. No reason, we don’t know if it’s demand or Covid related. It’s possibly the latter, given sources have reported illnesses at that Gigafactory and the suppliers’ factories.
Fourth quarter deliveries must be reported in the first few days of January. The once-optimistic Dan Ives on Wedbush isn’t sounding optimistic. Criticizing Musk and lowering estimates to 410-415k (vs. 450k earlier). The street whisper number is around 435k.
If Tesla disappoints even after the discount, it will surely be time to re-evaluate the 2023 projections. That said, there is a chance otherwise, with Tesla reporting blown numbers for deliveries. Don’t be too pessimistic.
Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Be aware of the risks associated with these actions.