Tesla: Approaching Opportunity Levels (NASDAQ:TSLA)

It is time to pick up coverage on Tesla (NASDAQ:TSLA) as I have not covered the name for many years, as this was not an obvious name to cover with valuations in mind of course. The business has been on fire in recent years, but its stock even more so, before reverting in a massive way in 2022.

Concerns about operating conditions for Tesla, but more so distraction of its executive Mr. Musk, have been the drivers behind an incredibly fierce sell-off in recent weeks. While Mr. Musk’s involvement and focus were a guarantee for outperformance and a premium for the shares, it almost seems that a negative premium is attached to the business here because of his role.

Of course, the multiples for the stock are still far richer compared to automotive peers, but the gap is a lot smaller than it has been in recent years, of course, as the debate is of course still very much ongoing if Tesla is more than a car manufacturer, with its batteries, solar and technology activities.

A $20 stock (adjusted for the three-for-one split this summer), when the company went public in 2017, traded at $50 in spring of 2020. What followed was incredible momentum with shares having risen to $300 at the start of January 2021 and $400 later that year, now having sold off some 70% to $112 per share. The downfall has been great, larger than most technology peers, amidst concerns on the business, but more so because of concerns that Mr. Musk lost his touch here.

Some Perspective

Tesla has come a long way. The company generated nearly $10 billion in sales in 2017 on which it posted an operating loss of $1.6 billion as the company doubled sales through 2019, effectively posting break-even results. Following the pandemic, the company grew 2020 sales to $27 billion, on which a near $2 billion operating profit was posted, largely due to regulatory credits.

The outbreak of the pandemic and rising fuel costs drove a spectacular 2021, with sales up 73% to $47 billion as GAAP operating profits rose to $6.5 billion, with credit revenues down to $1.5 billion. The momentum was very strong with fourth quarter revenues in 2021 trending at $70 billion a year on which operating profits of $10 billion were posted, unheard margins for a car manufacturer.

The fact that profitability has paid for the required capital expansion of the new large overseas factories in recent years, with the share count stable recently. The balance sheet is actually rather small in relation to the size of the business and its ambitions, with total assets posted at $62 billion by year-end 2021. This includes nearly $18 billion in cash and equivalents and a rapidly growing equity position.

The company started 2022 with a solid quarter, with revenues posted at $18.8 billion, a more than $1 billion increase on a sequential basis, although total production and deliveries were pretty flat on a sequential basis at around 305,000-310,000 units.

Second quarter production and delivery volumes fell to 255,000-260,000, still marking decent year-over-year gains, but a big slowdown on a sequential basis. Tesla attributed most of the slowdown to the shutdown of the factory in Shanghai related to pandemic-related measures, hurting production levels.

The three-for-one stock split took place in August and was reflected in the third quarter results. Production levels rose by more than 100,000 units on a sequential basis to 366,000, a huge number. The number exceeded delivery numbers of 344,000, which is a substantial gap, yet delivery numbers have been strong in part because of catch-up demand from the second quarter.

Moreover, Tesla has famously said that it was smoothing out deliveries to reduce the strain on logistics capacity, holding some more vehicles in transit and inventory. Revenues rose to $21.5 billion, trending at $86 billion a year here. A GAAP profit of $3.3 billion works down to $13 billion on average a year.

With 3.4 billion shares outstanding on a diluted basis, the company now supports a $380 billion valuation, far below peak valuations in excess of a trillion. This valuation includes a cash position of $21 billion here with debt rapidly vanishing here as the capital generation is impressive, even as capital spending exceeds depreciation charges by $3-4 billion per annum for quite a while now.

Based on a $360 billion enterprise valuation, the company trades at just over 4 times sales and right here about really “just” 27 times earnings. Comparing this to a traditional giant like General Motors (GM), we see that GM is still a lot bigger with revenues coming in around the $150 billion mark, yet earnings only trend around $10-$11 billion a year here, less than Tesla.

GM currently commands an equity valuation around $50 billion at $33 per share, as the balance sheet is hard to read into with the balance sheet, including large pension liabilities as well as large financial activities. This means that GM trades far below 1 times sales and at a low current earnings multiple, but the gap used to be much bigger of course.

Two Concerns

Right now, there are two major concerns in my eyes. The first starts with Tesla and its operations. This comes as Tesla reportedly is engaging in discounting practices. There have also been calls about production reduction and halts in its Shanghai facility in January, yet that is hard to read into without knowing the exact details, as production halts are quite typical for the time of year, of course.

While momentum will likely be softer, it is just guessing if and how high the miss will be. In the meantime, the company finds itself in a solid financial shape, holding well in excess of $20 billion in cash, not having any major debt. Moreover, the company posts solid profits as operating margins in the mid-teens are quite strong, certainly for an automotive player. Besides the doubts and concerns about the economic cycle, there is the debate on electric competition as well, yet so far, Tesla has proven its naysayers wrong on this.

The arguably bigger elephant in the room is the behavior of Mr. Musk which not only bought Twitter, yet he has devoted lots of time with his newly acquired asset, causing turmoil in the process and apparently losses as well. This is reportedly the trigger for him to sell large quantities of Tesla stock to fund these losses, even putting shares up for collateral.

This means that less attention by Mr. Musk is likely seen at a point in time when the business can use his magic, as the premium element of his involvement seems to translate into a discount, making poor governance structures now more painful with the (lack of) governance being seen a positive in recent years.

What Is The Issue?

The two factors above play a massive role in the current depressed share price, yet we tend to forget how strong the momentum has been. Even with shares down 70% from last year’s highs, shares have still tripled from the start of 2020, as a testament of the extent of the momentum.

This makes me a bit cautious when many names have seen a reversal of the share price to pre-Covid-19 levels, albeit that Tesla’s fundamental performance has come in far ahead of the pre-pandemic results. I do not reasonably expect revenues to revisit the 2019 levels with quarterly revenues now still coming in around annual revenues for the year 2019!

Amidst all this, I find it still early to go bottom fishing, but we should see some support somewhere here, probably in the double digits. Right here I am not willing to pull the trigger, but appeal is arriving at some point to come.