I’m bearish on Tesla (NASDAQ:TSLA), and I can’t help but think that Elon Musk’s announcement regarding the unveiling of a Robotaxi on August 8 is something of a distraction. So, why would Musk be distracting us? Well, vehicle sales are slowing, margins are falling, and Tesla’s dominance in the electric vehicle (EV) segment is over. Plus, the stock’s valuation is high. This is why I’m bearish on TSLA stock, but I don’t expect it to move much until we know what Musk has in store for us on August 8.
Tesla’s Performance Is Underwhelming
In Q1, Tesla reported a 9% decline in quarterly revenue — the steepest year-over-year decline since 2012 — and a 48% decrease in adjusted profit. The company’s adjusted earnings per share (EPS) came in at 45 cents versus the expected 49 cents. Also, revenue for the quarter fell to $21.3 billion — less than the $22.2 billion the market had anticipated.
Revenue fell both on a year-over-year basis and sequentially. Meanwhile, net income dropped 55% to $1.13 billion from $2.51 billion a year ago. On a non-adjusted basis, net income per share fell from 73 cents a year ago to 34 cents in Q1 2024. Moreover, in an increasingly competitive market, Tesla’s price cuts negatively impacted margins with no obvious end in sight.
However, Musk also pointed to unforeseen challenges as a reason for the company’s underperformance. “We navigated several unforeseen challenges as well as the ramp of the updated Model 3 in Fremont. As we all have seen, the EV adoption rate globally is under pressure, and a lot of other order manufacturers are pulling back on EVs and pursuing plug-in hybrids instead. We believe this is not the right strategy, and electric vehicles will ultimately dominate the market,” Musk said in the Q1 earnings call.
Am I Underestimating Tesla’s AI Potential?
In Q1, Tesla’s free cash flow turned negative. The Austin-based company reported a deficit of $2.53 billion, representing a significant change from a year ago when Tesla had a free cash flow of $441 million. In the fourth quarter of 2023, Tesla reported free cash flow of $2.06 billion. Tesla explained that the negative cash flow was due to a $2.7 billion increase in inventory and $1 billion in capital expenditures on artificial intelligence (AI) infrastructure.
AI is certainly the buzzword of investing at this moment in time, and I don’t believe that it’s overused. However, some analysts are arguing that investors shouldn’t be valuing Tesla as a car company but as a tech company at the forefront of AI.
I’m a little skeptical about this, even though I appreciate that Tesla has AI capabilities in areas like manufacturing, the Tesla Bot, and energy trading. So far, though, I’m yet to be convinced that these are parts of the business with revenue-generating capacity that is remotely comparable with car production.
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Of course, the AI-enabled Robotaxi could change my opinion. The question is whether Tesla has really managed to achieve a quantum leap in autonomous technology. This would truly put Tesla in the driving seat and establish its dominance in the autonomous segment.
The growth of the Robotaxi segment would also open up another revenue-generating segment, which does look highly attractive. Autonomous cars require lots of computational power, but that power would only be used when the vehicle is active. This means these impressive computers will only be used a fraction of the time.
Similar to Amazon (NASDAQ:AMZN) Web Services, Tesla could sell this spare capacity and create a new and potentially sizeable revenue stream. “It seems like kind of a no-brainer to say, OK, if we’ve got millions and then tens of millions of vehicles out there where the computers are idle most of the time that we might well have them do something useful,” Musk said in the Q1 results call, adding that Tesla could have 100 gigawatts of “useful compute.”
Tesla’s Valuation and Musk’s Promises
Musk has a habit of overpromising and underdelivering. So, this is why I remain bearish on Tesla. I’ve yet to see evidence that Tesla is about to drop a fully autonomous vehicle, which happens to have spare computational capacity that can be used and sold as part of some Tesla cloud.
This wouldn’t be a problem if Tesla’s valuation was in line with its peers. However, Tesla is currently trading around 70x forward earnings. What’s more, analysts clearly aren’t convinced that growth will pick up in the medium term, with a price-to-earnings-to-growth ratio of 5.75x.
For now, the promise of an autonomous vehicle appears to be keeping the share price elevated despite the lack of concrete information. All eyes, therefore, are on August 8. I believe the stock could tread water until then.
Is Tesla Stock a Buy, According to Analysts?
On TipRanks, Tesla comes in as a Hold based on nine Buys, 15 Holds, and nine Sell ratings assigned by analysts in the past three months. The average Tesla stock price target is $174.60, implying 6.4% downside potential.
The Bottom Line on Tesla Stock
Personally, I’m skeptical as to whether Tesla has really made a breakthrough in autonomous vehicles. Nonetheless, I accept that Robotaxi and fully autonomous vehicles, in general, have huge potential. This potential isn’t limited to the road but also, as Musk discussed, the ability to sell unused computing power to the rest of the market. However, at 70x forward earnings, I simply can’t put my money behind Tesla.
Disclosure