Tesla (NASDAQ: TSLA) dropped more than 10% on Jan. 27, pushing its share price to 35% below its 52-week highs. The company recently announced it’s planning to spend 2022 focusing on making a robot, the ‘Tesla Bot’, over launching new car models. In our view, as the company attempts to casually shift from the EV race, we expect it to underperform.
Tesla’s competition is increasing dramatically and we think the company will struggle in upcoming years.
Iron Man 1 had a famous “Mad Money” scene where Stark Industries was critiqued after saying it’s no longer making weapons. “Sell sell sell” Jim Cramer says after asking what you get when you’re a weapons company that doesn’t make weapons. Tesla is spending 2022 as a car company that’s not focusing on making more cars.
Tesla has said it’s no longer planning to release the Cybertruck in 2022. As we discussed in our article about Ford (NYSE: F) versus Tesla, Ford’s electric truck has been performing incredibly well. With Rivian (NASDAQ: RIVN) already also having a truck, and the Cybertruck’s unusual design, we think the company will never dominate the EV pickup truck business.
Competition is increasing rapidly and the least that Tesla could do would be to launch new models so that it can maintain its competitive position. The company also took the time to say that it would no longer be launching its $25,000 cheaper production car, again locking out a substantial segment of the market for the company.
Tesla 4Q 2021 Financial Performance
In our view, Tesla’s 4Q 2021 and annualized financial performance highlight how the company will struggle to justify its valuation.
Tesla managed to grow its automotive revenue substantially for the year ($47.3 billion) with $1.5 billion of regulatory credits. The company had a strong GAAP margin; however, counting operational expenses, its operating margin has remained low. The company’s annualized net income gives it a P/E of roughly 160x, showing how expensive the company is.
Financially, the company’s $5 billion of FCF ($3.5 billion without regulatory credits) gives it a 0.4% FCF yield (without regulatory credits). With competition increasing and interest rates expected to go up, that’s not a valuable FCF yield for investors. Even if margins stay the same, it’d need to sell 25 million vehicles annually to have a reasonable 10% FCF yield.
That’s 2.5x the amount of vehicles Toyota (NYSE:TM) sells. Looking at cash equivalents due to capital expenditures, outside of regulatory credits, its cash and cash equivalents decreased substantially. The company is finally profitable but its financial performance is still nowhere near enough to justify its valuation.
Tesla Alternative Businesses
Tesla has several alternative businesses; the two largest categories are the energy business and FSD.
We’ve discussed the energy business in more detail here. However, in our view, the clear takeaway, as evidenced through stagnant solar performance, is that the company’s low market share means it has no significant solar business. Given that even larger solar companies don’t have a massive market value, we expect the solar business to remain strong.
The company’s power storage system has significant demand. However, the company has two conundrums here. The first is that other companies are rapidly expanding on battery tech, and outside of batteries, there’s no significant barrier to entry.
The second is that as long as the company ramps up car production, battery supply will continue to be a massive limitation. That means the company will be more incentivized to redirect battery capacity towards vehicles rather than storage.
Lastly is the company’s FSD. As we’ve discussed before, despite the company’s lofty support for itself, we think it’s several years away from full self-driving. Even if the company does eventually succeed, and a favorable regulatory framework is incorporated, we think other companies will beat the company to the punch.
That’s based on the company barely testing self-driving versus competitors operating cars without drivers already.
Tesla Growth Limitations
In our view, Tesla is hitting its growth limitations. The company has guided for less model launches in 2022 as it focuses on its humanoid robot and it expects the chip shortage to continue throughout the year.
In our view, the company has by far hit its peak market share. We expect its market share to decline significantly as competitors launch new models. This is evidenced in the declines in the company’s higher end legacy Model S / X sales. Model 3 sales have continued to outperform; however, as discussed above, the company has skipped plans for a $25,000 vehicle.
As seen in the graph above, numerous more electric vehicles are expected to launch in 2022. The company’s existing factories support >1 million vehicles / year and, by 2024, that could increase towards 2 million. However, right when the company should be in its heyday of production, the chip shortage is giving competitors a chance to catch up.
Competitors catching up will place growth limitations on the company, preventing it from justifying its valuation.
Our view is that the chip shortage is the worst thing that could have happened to Tesla. It’s given competitors, who’ve finally realized the EV threat, plenty of time to catch up. Traditional car companies are, for the first time in a decade, releasing EVs that are competitive with Tesla vehicles. That will threaten Tesla’s future market share.
Tesla’s alternative businesses, especially FSD, are worth significantly less than the premium the market seems willing to pay. In solar and FSD, despite the company’s allegations, it’s behind competitors according to most perspectives. Its megapack storage business has potential but the company has better uses for those batteries.
Going forward, we expect Tesla to remain a substantial way away from justifying its market capitalization, hurting future shareholder returns.
Tesla Thesis Risks
The risk to our thesis is that Tesla is growing rapidly and has shown an ability to improve its margins that impressed even us. The company has guided for ~50% annual vehicle sales growth for the next several years, pointing towards a runway for ~3 million in annual vehicle sales. Should the company keep growing with strong margins, it could potentially generate substantial returns.
Tesla has outperformed where we originally thought the company would be several years ago. The company had a strong 2021 and it’s guided for several years of 40-50% vehicle production growth. That’s despite the chip storage which, at least through 2022, is expected to put significant pressure on the company’s production.
Going forward, we expect competition from other car companies to increase dramatically. Tesla has a triple-digit P/E and it’s already moved away from two exciting market opportunities (the Cybertruck and the $25,000 car). We expect the company will never reach a price that justifies its current valuation hurting future shareholder returns.
As a result, we recommend against investing.