By Alex Kimani
A decade since its public debut, Tesla Inc. (NASDAQ:TSLA) has evolved from a somewhat nondescript if overreaching EV startup into one of Wall Street’s most popular growth stocks.
TSLA has continued taking out fresh highs, going on another parabolic run that saw it climb a dizzying 400% in the year-to-date as the company continues to defy bearish expectations that low oil prices and a crippling pandemic would put a damper on its business.
The EV king certainly did not disappoint during its latest earnings call, managing to not only beat delivery expectations–produced 145,036 vehicles (+51% Y/Y) and delivered 139,593 (+44%)–but also posted impressive topline growth (Revenue of $8.77B (+39.2% Y/Y) as well as booking a record operating income of $809M.
The Joe Biden victory is largely being viewed as a big win for clean energy and the EV sector, with CFRA analyst Garrett Nelson picking Tesla, Aptiv Plc. (NYSE:APTV), BorgWarner Inc. (NYSE:BWA), Ford Motors (NYSE:F), General Motor Co (NYSE:GM), and Visteon Corp. (NASDAQ:VC) as the companies most likely to receive a jolt under Biden.
In case you are wondering how traditional ICE companies have made it on that list, Nelson says automakers with largely union workforces are likely to emerge as big winners from tax incentives that would further stimulate EV production.
Interestingly, TSLA has remained strangely muted, shedding 5% in the first week of trading since Biden was declared the winner in a tight race. Apparently, the Tesla halo appears to be fading away. For the bulls, Tesla is simply consolidating, while the bears will contend that the stock is on the cusp of a larger pullback.
While we remain bullish on TSLA over the long-term, there are a couple of reasons why TSLA stock is likely to face a much tougher road ahead.
Reason #1: Steep Valuation There’s no way to sugarcoat this: Tesla is overvalued by most traditional valuation metrics.
Tesla currently has a P/E GAAP (FWD) of 336.8, way higher than the sector median of 22.3; EV/Sales (FWD) multiple of 12.9 vs. 1.4, EV/EBITDA (FWD) 67.7 vs. 12.9, Price/Sales (FWD) 12.9 vs. 1.1 and Price/Book (FWD) 23.6 vs. 3.0.
Tesla’s steep valuation becomes even more glaring when you pit it against traditional auto manufacturers.
Tesla currently boasts a market cap of $397.40B, about 3.5x the combined value of the three largest automakers: General Motors ($58.05B), Ford ($33.14B), and Fiat Chrysler Automobiles US (NYSE: FCAU) with a market cap of $22.85B. That’s hard to wrap your head around when you consider that the three companies sold more than 10x as many units as Tesla during the last quarter. However, in Tesla’s defense, it was the only one of the four companies to record positive growth.
Tesla’s current market cap implies that the company will be able to sell more than 6M units, or one-in-four of global EV sales, by 2030, marking a 12-fold increase in production output in just a decade. That won’t be an easy feat to pull off considering that Tesla’s global EV market share currently stands at 19%, and also when you take into account that Tesla brands will be competing against nearly 500 other brands, or 10x the current number of EV brands globally according to BNEF estimates.
On a brighter note, Tesla has a clearer lane to 1M EV sales as early as 2021, good for 100% Y/Y growth from 2020’s expected deliveries of 500K units. That kind of growth would definitely power another big rally for TSLA stock.
Reason #2: No Clear Path for Energy Business
One way to justify TSLA’s stratospheric valuation is by pointing out the growth potential of its energy business.
Indeed, during its latest earnings call, Tesla CEO Elon Musk told investors that he expects the energy business to “grow to roughly the same size” as its EV business.
But that’s probably easier said than done.
Last quarter, Tesla’s automobile revenues stood at nearly 87% of total revenue compared to under 7% for its energy products. Given how fast Tesla’s EV business has been growing, the energy business would have to grow at a ludicrous clip to have a chance of catching up even in a decade’s time.
Tesla’s energy business revolves around SolarCity, a company it acquired in late 2016. Back then, SolarCity was a dominant force in residential solar in the US market, but has virtually collapsed under Tesla, going from ~40% market share to about 5% by the end of 2019. That’s due to a raft of factors, including Tesla’s solar products lacking a competitive edge as well as delays in the launch of innovative products such as the Solar Roof.
Tesla’s energy storage business, on the other hand, has enjoyed much better traction. Tesla’s storage deployments have managed to grow at ~100% CAGR over the past four years compared to -42% CAGR for solar deployments. The storage business recently scored a big win after striking a deal with California’s PG&E that will see Tesla construct a 182.5 MW, 730 MWh battery energy storage system at Moss Landing, one of the largest of its kind in the world.
Luckily, the solar business appears to be turning a corner. The company announced that solar shipments increased 111% Q-o-Q and 48% Y/Y during the last quarter. That’s quite impressive, considering the industry has projected a 25% decline in rooftop solar installations in the current year due to the adverse effects of the pandemic. Tesla has been able to turn the solar business around mainly through price cuts and aggressive use of online sales channels.
Tesla’s solar business is on the right side of the solar megatrend, with solar energy expected to account for 80% of clean energy growth from 2022-2030.
Still, it will take many years of that kind of extreme growth for the energy business to approach the size of Tesla’s automotive segment, meaning it could remain an auxiliary business for at least another decade.
Reason #3: Growing Competition
As we have pointed above, Tesla’s marketplace is likely to look very different from the current one, with BNEF predicting the company could be going up against ~500 EV brands by 2030.
And Tesla is already facing much stiffer competition than it did a few years back.
Wedbush Securities analyst Dan Ives has predicted that GM’s GMC Hummer EV will be the foundational model of the company’s $20B push into the EV space over the next five years. GM has a target of 1M EV sales a year across the U.S. China, though the GMC Hummer though starts at a much higher price point of $113K compared with a base price of $39,990 for Tesla’s Model 3 Standard Range Plus.
Recently, BMW (OTCPK:BMWYY) launched the iX, a 500-hP full-electric SUV that the company is positioning as its flagship EV model. Luckily, Tesla again has the upper hand on pricing, with The Verge estimating that the iX could start at $70,000 or more.
Tesla is also facing growing competition in its pivotal China market, where a GM Model has been outselling the immensely popular Model 3.
Tesla remains, by far, the most recognizable name in the global EV space. However, there won’t be a shortage of rivals trying to knock it off its pedestal in the coming years–and the likes of GM are already proving to be serious contenders.
By Alex Kimani for Oilprice.com