Just when investors think they have got the measure of Tesla (TSLA:NASDAQ), Elon Musk drops a bomb. Having feared the worst, Tesla’s first quarter (Q1) 2024 report (25 April) gave investors the clarity they were seeking on mass-market vehicles, and while detail remains thin, Musk said production would likely begin ‘in early 2025, if not later this year’ and would include ‘more affordable models.’

This was classic Musk, whose playbook seems at times to have been written with the express purpose of keeping investors on their toes.

It was important news. Competition in the EVs (electric vehicles) space has been fierce and consumers have been thinking twice about big-ticket purchases as their finances come under pressure from the higher interest-rate environment. A mass market Tesla, priced at around $25,000 and referred to by most as ‘Model 2’, is seen as giving the company the next growth lever to pull.

Bank of America analysts said the earnings update ‘addressed key concerns’ and ‘revitalised the growth narrative’. Tesla shares rallied 18%. ‘In the near-term, the tide in news flow appears to suggest the risk to the stock is skewing more positively,’ the investment bank added. 

Deutsche Bank also expressed relief that Tesla ‘is not completely giving up on selling cheaper consumer models, nor is it staking the company’s entire future on robotaxi’, referring to the firm’s plans to produce a fleet of full self-driving taxis. 

But not everyone was drinking the Kool Aid. Bernstein said: ‘We struggle with why Tesla needs a discrete robotaxi offering, and we believe widespread deployment of full self-driving is five to 10 years away.’

WHAT IS TESLA?

This narrative is crucial to understanding how Tesla is perceived. A 21st Century energy company, an AI (artificial intelligence) play, a full self-driving fleet operator, even a robotics developer? All of these are based in truth, and SolarCity (solar energy installations, Megapack (energy storage), Dojo (AI platform) and Optimus Gen 2 (Tesla’s humanoid robot) could all drive substantial shareholder value down the line but ask the average person in the street what Tesla is and they’ll tell you it is a car manufacturer, and EVs – sales, deliveries, ticket prices – are what drive the share price.

Producing these new affordable models on the same production lines as its current vehicle range should mean limited new investment and the ability to make the most of existing facilities, a strategy rejig that should be good for the bottom line.

Where Tesla used to be about first-mover advantage over profits, the road ahead will see the company and its shares judged like a more mature business where financials really matter.

Few entrepreneurial chief executives get the leeway afforded to Musk, and with good reason – his investor returns track record is right up there with the best, thanks to first PayPal (PYPL:NASDAQ), now Tesla and, for those exposed to certain private equity investments, SpaceX and Neuralink, although data is a little more foggy on Musk’s brain chip meditech start-up.  

If you invested $1,000 at IPO (worth approximately £668 at then $1:£0.668 rate), you’d have bought 59 shares (rounded up slightly to £1,003, excluding dealing charges). Allowing for subsequent stock splits, your $1,003 would today be worth more than $160,000 based on Google Finance data.

TESLA FUNDAMENTALS

This is at least part of the reason why Tesla and Musk have built a loyal following of investors, with legions of people, willing to back the business with their cash. But if Tesla really is a primarily vehicle manufacturer, can it justify its still lofty valuation even after 2024’s dismal start.

Before the recent rally, Tesla had a market cap of about 437 billion. That’s 4.4 Ferrari’s (RACE:NYSE) or 5.75 BYD’s (1211:HKG), the Hong Kong-listed Chinese EV maker, and arguably Tesla’s most direct competitor.

On Koyfin’s consensus forecasts, Tesla traded on a 2024 PE (price to earnings) multiple of 56 before the recent rally, now up at 66, and 5.4-times sales. This falls to 4.4-times sales and a 47 PE on 2025 estimates. That’s clearly out-of-kilter with legacy car makers like Volkswagen (VOW3:ETR), General Motors (GM:NYSE) and Ford (F:NYSE), on single-digit PEs.

As it should, argue Tesla fans. Legacy manufacturers have threadbare operating margins and face enormous costs down the line to transition petrol and diesel production lines and bulk up EV output, as hard as they are trying. But where production efficiency used to show up in glaringly better operating margins, no more, months of vehicle price cuts have seen to that.

Since peaking at 16.7% in 2022, according to Stockopedia data, they have fallen dramatically to 9.2% in 2023 and to just 5.5% in Q1 2024, and that’s including full self-driving, leasing and carbon credit income. Returns on capital have also dived, from 24.5% in 2022 to 9.3% over the past 12 months, That’s still a lot better than the 3% to 6% range of the previously mentioned legacy firms, but miles behind Ferrari’s 26.7%. which sported 27.1% operating margins in 2023, up from 24.1% in 2022.

Financials in Q1 2024 provide little hope that things will get better either, where adjusted EPS fell from $0.85 to $0.45 year-on-year and missed $0.52 consensus. That was on a $2 billion year-on-year revenue decline to $21.3 billion, versus the $22.3 billion analyst projections. Operating profit fell to $1.2 billion and adjusted net income fell to $1.5 billion, both down 50%.

Despite Musk’s optimism that 2024 deliveries will ‘grow’ on last year’s record 1.81 million, EV demand is slowing this year. Tesla’s 386,810 deliveries tally in Q1 undercut even the lowest estimates and marks the lowest quarterly deliveries since 344,000 in Q2 2022. Since then, analysts have been revising lower delivery estimates.

‘Apart from further price cuts we believe full year sales growth may require help from the market as well as seamless execution on cheaper new model introductions,’ Morgan Stanley analyst Adam Jonas wrote.

WHAT SHOULD INVESTORS DO?

As ever, this is no easy question and the answer will depend on each investor’s portfolio, time scale, risk appetite and view of what Tesla is. Analysts remain supportive of the company and stock with twice the number of buy to sell recommendations, based on Koyfin data. That said, it is notable that there are far more fencing-sitting holders than in the past, an indication of the increased uncertainty facing the company in the short term.

‘Following the decline in first-quarter deliveries, we think Tesla will reduce costs in 2024 to maximise profits,’ says Morningstar’s Seth Goldstein. ‘This reflects our view that the firm will aim to stabilise unit gross profit margins in the automotive segment and focus on improving companywide operating profit margins.’

Post Q1, Goldstein nudged up his stock fair value estimate from $195 to $200, implying 18% upside in the coming months. ‘We view Tesla as undervalued,’ he said.

Another way to look at the stock is to strip human judgement altogether and rely on AI-powered analysis, certainly in the short term. New York and Barcelona-based Danelfin has developed an AI stock analytics platform that calculates more than 40 different fundamental, technical and sentiment features that are reckoned to hold greatest sway over stock performance, the gives a score out of 10.  

Tesla scores a nine because of its overall probability of beating the S&P 500 over the coming three months. But before you hand the keys to your portfolio over to automation, Danelfin’s Tesla probability percentage is 41.3%, so in other words, less than a 50/50 chance. This suggests that the fence-sitters may be right and that the best course of action for investors today is to keep the Tesla shares you have, but don’t buy any more for the time being.

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