The Tesla Growth Story Is Officially Dead
Many companies are vying for their piece of the ever-growing EV market share pie, it's Tesla that's ridden its first-mover advantages to outsize returns.
As of the closing bell on Feb 22, Tesla was sporting a nearly USD629 billion market cap, which is more than the combined value of many of the world's legacy automakers. It achieved this mark by doing what no other automaker had done for more than a half-century: successfully build a car company from the ground up to mass production. Last year, Tesla produced almost 1.85 million EVs.
Further, Tesla is the only pure-play EV maker that's generating a recurring profit, based on generally accepted accounting principles (GAAP). Although legacy automakers like $General Motors(GM.US$ and $Ford Motor(F.US$ are generating hearty profits from their internal- combustion engine vehicles, they, along with every other pure-play EV manufacturer, have EV segments that are bleeding red.
The more than 12,000% gain Tesla has delivered to shareholders since its 2010 initial public offering (IPO) is also a reflection of the company attempting to become more than just an EV maker. CEO Elon Musk has overseen the placement of nearly 55,000 supercharger connectors, and has talked up the potential of Level 5 autonomous driving software, as well as its Optimus humanoid robot, among other innovations.
In other words, Tesla's stock has been powered by the belief that it's a premier growth story.
But in my view, this story-book growth tale is officially dead.
For a moment, let's put aside specific catalysts and headwinds and focus on a company's rawest measure of success: its earnings per share (EPS).
Between 2019 and 2022, Tesla's automotive revenue more than tripled to USD71.5 billion, and its adjusted (non-GAAP) EPS catapulted from USD0.01 to USD4.07. It was every bit the game-changer Wall Street expected it to be, with historically low interest rates and fiscal stimulus during the COVID-19 pandemic assisting its outperformance.
But based on Wall Street's consensus EPS estimates, the 2022 to 2025 stretch tells a completely different story. After reporting USD4.07 in EPS in 2022, the company's per-share profit declined by 23% in 2023 to USD3.12. For context, EPS estimates for 2023 entered the year above USD6 per share, which means they were halved over the course of 12 months.
It's the same story for Tesla's 2024 and 2025 consensus EPS, which currently sit at USD3.05 and USD4.06, respectively. Wall Street's 2024 forecast has come down from a peak of over USD7 per share, while the USD4.06 expected in 2025 has also been slashed by more than 50% over the past year and change. Although earnings estimates are subject to revision, Wall Street is expecting one of the leading growth stocks over the past decade to go absolutely nowhere (USD4.07 EPS in 2022 and USD4.06 EPS in 2025) through mid-decade.
To be fair, the entire EV industry has hit its first true speed bump. Higher interest rates have made borrowing money and financing new EVs costlier. Additionally, EV infrastructure still isn't widespread, which serves as an industrywide deterrent.
But as the world's most-valuable EV company by market cap, it's Tesla's glaring flaws that stand out the most.
Tesla's problems truly became recognizable last year when the company began aggressively reducing the selling price of its 4 production models (3, S, X, and Y). While shareholders had been hoping that these price cuts were the result of production efficiencies, Musk made clear during the company's annual shareholder meeting in May that his company's pricing strategy is dictated by demand. With Tesla continuing its price-reduction strategy into 2024, it's a crystal-clear indication that EV demand has waned and inventory levels have risen.
Another problem for Tesla is that its ambitions to become more than just a car company are falling flat. Sales growth from its Energy Generation and Storage segment have fallen off, while gross margin for the company's Services segment clocked in at less than 3% during the fourth quarter. While Tesla has enjoyed spurts of success (e.g., the acceptance of its Supercharger network among legacy automakers), it's also been prone to failures, such as with the acquisition of SolarCity.
The quality of Tesla's profits and cash flow also need to be called into question. During the third and fourth quarter of 2023, the company generated a respective 41% and 35% of its pre-tax income from a combination of regulatory tax credits that are sold to other automakers and interest income from its existing cash. This is an outsize percentage of its pre-tax income coming from sources that simply aren't sustainable and aren't representative of its EV sale/leasing operations.
With regard to free cash flow (FCF), Tesla generated roughly USD2.06 billion in 2023. If its USD1.81 billion in stock-based compensation were backed out of the equation, and its interest income and regulatory tax credits fully taxed, the company's FCF would effectively disappear.
Elon Musk deserves blame, as well, for Tesla losing its luster. Despite being an innovator, Musk has found himself in the crosshairs of securities regulators on more than one occasion. Perhaps worst of all, the vast majority of Musk's innovations have failed to get off the ground. He's promoted Level 5 full self-driving as being "one year away" for a decade and failed to deliver on a promised 1 million robotaxis. Backing out Musk's numerous unfulfilled promises would wipe away the bulk of Tesla's market cap.
Tesla's otherworldly valuation of 65 times forward-year EPS suggests it's one of the most-revolutionary companies of our time. In reality, it's a profitable but still cyclical car company that's trading at roughly 10 times the forward earnings multiple of GM and Ford.
It was fun while it lasted, but the Tesla growth story is officially dead.
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