Tesla is rapidly becoming the carriage that took Cinderella to the ball. A little over a year ago, it posted a record value on the stock market of $1.2 trillion. At the time, with just a 1% share of the global auto market, Elon Musk’s company was worth more than all the other listed automakers combined, which accounted for the other 99%: Toyota, Volkswagen, Daimler, General Motors, BMW, Stellantis, Ford, Ferrari, Hyundai, Nissan… Tesla was rubbing shoulders with the big tech companies – Apple, Microsoft, Alphabet and Amazon. A year later, the bubble has burst. While Musk was entangled in his acquisition of Twitter, Tesla lost more than 70% of its value. It has suffered from the slowdown in the global economy, a fresh outbreak of the coronavirus pandemic in China and growing competition. But, above all, investors have stopped seeing Tesla as a technology company. It is, after all, a car manufacturer.
The latest setback has come with sales figures for the fourth quarter. Until now, Tesla’s biggest problem was meeting demand. However, those eternal waiting lists have now passed into history. The latest published figures show that undelivered stocks are piling up. The company attributes this to an increase in the number of vehicles in transit from factories, but that sounds increasingly like a bad sales pitch.
Tesla produced 439,701 vehicles and delivered 405,278 in the fourth quarter of 2022, well short of targets and expectations. During the first three quarters of 2022, the company had been manufacturing more cars than it was capable of selling. The company has launched heavy discount initiatives, although this has angered recent buyers, particularly in China, where customers have staged protests at dealerships.
Tesla is a success and growth story: investors pay for its future, rather than its present. The Volkswagen Group, for example, posts three times as many sales and higher profits but is worth only one-fifth of the electric car (EV) maker’s value. The reason is its growth rate, its higher margins and its huge market potential. The question is how much of that market Tesla will be able to corner.
Goldman Sachs analysts believe the electric car market will grow strongly, and that Tesla is better-placed than its competitors to take advantage of the boom while protecting margins through cost-cutting measures, but they also list a number of threats: “The main downside risks to our thesis relate to the pace of EV adoption, auto demand, increased EV competition, the auto cycle, the autonomous car, key person risk, the internal control environment, and operational risks associated with Tesla’s high degree of vertical integration.”
What Goldman calls “key person risk” is an undisguised reference to Musk. Tesla’s CEO has spent 2022 entangled first in buying Twitter and then trying to firefight his chaotic management of the social network. In the eyes of many observers, Musk has gone from visionary genius to unsympathetic tyrant. Moreover, he has aligned himself with right-wing sympathies and has openly backed the Republicans in the United States, causing Tesla’s approval rating among Democratic voters to drop by more than 20 points, according to a recent poll by Morning Consult. It seems like a bad deal, given that former president Donald Trump and Republicans in general deride the electric car, while progressives are Tesla’s biggest customers. “The biggest risk the company has is its founder, Elon Musk, an individual with an eccentric personality and a thirst for the limelight,” says Carlos Arenillas, a member of Panza Capital’s investment team.
Tesla’s competition accelerates
Arenillas concedes that Tesla has had a huge impact on the automotive industry. “It has been the biggest contributor to popularizing electric vehicles, breaking the combustion engine monopoly and forcing the incumbents to react,” he notes. But increasing competition from traditional manufacturers has become a major threat.
Experts believe that Tesla will be unable to defend its high market share. The United States provides a clear example. From accounting for 79% of electric car sales in 2020, the US represented only 65% in 2022: S&P Global analysts estimate this share will fall to 20% by 2025. “Tesla’s position is changing as new, more affordable options arrive, offering equal or better technology and production build. Given that consumer choice and consumer interest in EVs are growing, Tesla’s ability to retain a dominant market share will be challenged going forward,” the firm said in a recent report. “As new EVs arrive, loyalty [to Tesla] will be tested.”
That represents a huge difference with the big tech companies: Google, Amazon, Microsoft and Apple have been able to corner markets and defend very high market shares with large margins. Tesla would justify a billion-dollar valuation if it were able to corner the car market of the future, but it does not appear to have a sustainable competitive advantage to do so, either in terms of the vehicles themselves, batteries or autonomous driving. It is more likely that the market will remain highly fragmented, as is the case with traditional cars. Even if Tesla occupies a privileged position, it will hardly be so dominant as to pay such an immense valuation premium.
Citibank analysts explain that, if subscribing to the view that the car of the future introduces new relevant markets, “traditional valuation methods become somewhat less applicable, as long as the balance sheet remains strong,” as opposed to a terminal or long-term value approach. But that method “injects much greater potential volatility” into the valuation. Tesla becomes a bet on the future. “There are too many unknowns to make a reasonable valuation,” Arenillas notes.
Tesla presents its results on January 25. More than the figures, investors are anxiously awaiting Musk’s appearance at the conference alongside analysts. In the meantime, he has weighed in on Twitter about Tesla’s plunge: “Long-term fundamentals are extremely strong. Short-term market madness is unpredictable.”
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