Tesla, Inc. (NASDAQ: TSLA) stands as a captivating force among US stocks, showcasing commendable strides in Q3 2023. Bolstered by a surge in vehicle deliveries and strategic diversification, the company witnessed a notable uptick in revenue.
However, beneath the surface of this financial narrative lies a nuanced reality, one which involves moderated growth catalyzed by a dip in average selling prices.
Operational intricacies that are important to people investing in Tesla, include increased expenses for Cybertruck and AI ventures, coupled with the costs of factory upgrades, and shape a challenging quarter.
Yet, amidst these dynamics, Tesla’s financial foundation emerged robust, fortified liquidity, and a resilient balance sheet. In this strategic guide, we delve into the intricacies of navigating Tesla stock, exploring the opportunities concealed within its challenges.
As investors contemplate investing in Tesla amidst the financial flux, we unravel key insights to empower decision-making in the dynamic world of Tesla investments.
Valuation
The first thing to come to mind regarding investing in Tesla would be where it stands in terms of valuation. Tesla’s current valuation raises eyebrows when compared to traditional automakers like Ford and Toyota, trading at 5-6 times their price-to-earnings (P/E) ratios.
While stocks can perform well at high P/E ratios, Tesla’s growth expectations demand scrutiny. The consensus predicts a 25-35% earnings per share (EPS) growth over the next two years, a target that seems ambitious, especially considering Q3 results.
Assuming a bullish scenario of sustained 30% EPS growth until 2027 and a 30x exit multiple, akin to top tech firms like Microsoft, the expected annual return hovers around 8%, aligning with market norms.
However, exceeding this hinges on achieving over 30% EPS growth, a daunting prospect, especially amid a potential 2024 recession.
The bear case suggests Tesla may stagnate, as seen in Q3, leading to a re-rating and a potential drop to $100 per share. Despite some considering the risk-reward unattractive, believers in Tesla’s diversified business lines may find appeal.
Caution prevails, urging investors to await Q4 earnings in January before making decisions. While shorting is not advised, staying on the sidelines mitigates the opportunity cost, considering the uncertain economic landscape and the potential for missed gains if a recession fails to materialize.
Assessing Growth
Having assessed the valuation of Tesla, lets now move on to something equally as important to those considering investing in Tesla: Growth.
In Q3, Tesla’s revenue reached $23.4B, reflecting a 9% YoY increase, albeit missing estimates by $790M. Concerningly, growth decelerated significantly from 47% in Q2, marking the first single-digit quarterly growth in three years.
The Automotive segment saw a modest 5% YoY increase to $19.6B, propelled by a 29% rise in Model 3/Y deliveries but offset by a 14% decline in Model S/X deliveries, linked to higher interest rates.
Despite production and delivery slowdowns, Tesla delivered 435K vehicles, up 27% YoY. Market share improved globally, driven by a strategic price-cutting approach. However, Tesla faces challenges in China, where EV sales dipped 18% in November.
Tesla’s Services and Other Revenue surged 32% YoY to $2.2B, with potential acceleration as Tesla partners with major automakers for Supercharger access.
Energy Generation and Storage Revenue rose 40% YoY to $1.6B, powered by Megapack deployments, while solar deployments dropped 48% due to industry challenges.
Despite near-term hurdles, Tesla’s growth story endures. Positioned as an industry leader in EVs and sustainable energy, Tesla’s resilience and strategic moves suggest long-term promise, especially as macroeconomic conditions potentially improve.
Investors should consider the broader market dynamics and Tesla’s role in shaping the future of sustainable transportation and energy.
Profitability
Valuation and growth are definitely meaningful to those keen on investing in Tesla, but they mean nothing if the company isn’t actually profitable.
Tesla’s profitability, a pivotal aspect for investors, has been a topic of intense discussion. In Q3, the Gross Profit stood at $4.2 billion, with an 18% Gross Margin, marking a 22% YoY decline.
Notably, Tesla sacrificed 600 basis points of Gross Margin to achieve a mere 9% YoY growth, raising concerns.
Segment-wise analysis reveals a contrasting picture. The Energy Generation and Storage segment outshines, boasting a 1,500 basis points YoY increase in Gross Margin to 24%.
Conversely, the Automotive segment, responsible for the overall margin dip, saw a decline from 33% to 19% due to lower ASP.
Despite a commendable Cost of Revenue per vehicle reduction, the faster decline in ASP leads to deteriorating Automotive Gross Margins.
Operating Profit in Q3 was $1.8 billion, reflecting an 8% Operating Margin, impacted by lower ASP, increased expenses for projects like Cybertruck and AI, and temporary factory inefficiencies.
While Tesla maintains a higher Operating Margin than the industry average, concerns arise as it diminishes. Net Income Margin also declined to 8%, aligning with industry standards.
However, Tesla stands out with superior ROIC, surpassing major competitors, indicating long-term capital efficiency.
In conclusion, Tesla’s strategic focus on market share and long-term gains, especially through Full Self Driving, suggests potential for improved margins in the future, driven by increased sales, new projects, and enhanced operational efficiency.
Investors should carefully consider these dynamics before navigating the Tesla stock.
