TSLA losing the Magnificent 7 shine

It’s easy to still ride on the founder story like all growth investors swear on as a bullish thesis placebo.

I am almost finishing up Pulak Prasad’s book - What I Learned About Investing From Darwin. And going through that book reaffirms my approach when it comes to valuing businesses and potential.

It’s also worth mentioning that Mr. Pulak Prasad himself acknowledges that his investment principle will make him miss out on a TSLA-esque stock, and he is more than happy to miss out.

2024 will be a tougher year for TSLA. The share prices might not show it now, but I fear that eventually there could be more discounts in the coming months.

Investing is never risk-free. The bold ones who take the bigger risks end up as the biggest winners. But how can a risk become too big to justify the risk-reward ratio?

Lives are at stake here, at the mercy of Full-Self Driving (FSD) a.k.a. Autopilot.

And if drivers shun away from Tesla cars for safety reasons, aren’t the shareholders at risk as well for the potential downside?

Margins and profits are hung out to dry in this competitive business. The aftermath of missing a revenue and delivery forecast is too big of a risk.

There might be arguments that vehicle recalls are pretty common in the automobile world. But when you think about the number of vehicles delivered by each maker and take the recall units over the delivery number, don’t you think Tesla’s number is way too high?

Compared to many people out there, I sincerely don’t see Tesla as a high-quality company.

High quality can be superficial and abstract. But in this context, we are talking about track record, margins, and predictability of future earnings.

It also means having a product and service that does not succumb to price slashing and compressed margins regardless of any scenario.

Tesla’s recent results seem to be reaffirming that its vehicles do not have a wide moat.

Source: TIKR.com

Ever since Q3’23, Tesla’s revenue growth decelerated from 47.2% YoY to just a mere 8.84%. Gross margins dipped below 20% for the first time and dipped towards 17.63%. This coincided with the plan to sacrifice margins for revenue and delivery as Gigafactory Shanghai and Germany came online to maximize asset utilization.

And if we compare TSLA with its peers, you’ll see that its gross margins have dropped from the mid-twenties down to below 20%, in line with the likes of Toyota Motor Corp (TYO: 7203), VOLKSWAGEN GROUP (ETR: VOW3), Mercedes Benz Group AG (ETR: MBG), and BYD Ord Shs H (HKG: 1211).

I put in Ferrari NV (BIT: RACE) just for comparison of how a luxury automobile manufacturer’s gross margins look.

Source: TIKR.com

And to imagine Tesla is worth almost the same as Toyota Motor, Ferrari N.V., Mercedes-Benz Group, BYD Company Limited all put together!

Fine. Let’s take a look at the balance sheet of Tesla to see how much hidden potential (intangible asset & goodwill) is these data worth.

Are you ready?

USD 615 million. Which is 0.58% of its total assets.

Tesla’s property, plant and equipment, and right-of-use assets are worth USD 34 billion, 55x more.

This company is more asset-intensive than the AI company you think it is.

Either Tesla chooses not to value these data on its balance sheet (which will be weird!), or there isn’t that much intangibility and edge (it’s not patented and anyone can be a frontrunner).

Goodwill contributes to 24% of the company’s total assets. And it will be affected by impairments every upcoming quarter.

There is no denying that Elon Musk plays an instrumental and pivotal part in Tesla.

If there was no Elon Musk, Tesla wouldn’t be the company it is today. Nor could it be what it is today with another leader.

I agree that one-of-a-kind executives need to be remunerated above industry standards, but to what extent?

It is commendable to see Musk demanding more shares as his net worth is tied to the share price performance of Tesla. Plenty of skin and flesh in the game.

But demand for at least 25% or threatening to build products outside of Tesla? Now isn’t that borderline blackmailing?

Is Elon Musk a one-of-a-kind executive? Yes

Do you see them blackmailing respective companies?

If I were Elon Musk, I would have my hands tied to slash prices to stem the bleed from the capacity availability of the Gigafactories. Tesla cars are not iPhones, where people willingly pay even though prices get more expensive after a few years.

And being pipped by BYD as the world’s largest EV manufacturer, 2024 does not look well for Tesla.

And with Musk showing a rogue side that might short-change retail investors, my pessimism grows.

This is not a company that Pulak Prasad would be lazy with. Buy at a great price and not think of selling.

Cause if it needs selling, this year could be a good year if you need cash.