Originally published on the LinkedIn TaaSMaster Newsletter site.
Despite Tesla’s dramatic growth since 2018, the swift contraction in its business and share price today have caught many on Wall Street and Elon Musk fans by surprise. While numerous Tesla supporters remain (just peruse Musk-owned X to find them), an increasing number of voices are now questioning the company’s business model as well as Musk’s leadership of the company.
Car Sales Under New Pressure
Global vehicle sales growth for Tesla slowed more than 20% in the first quarter compared to the same quarter last year, marking the first year-over-year sales decline in nearly four years. Additionally, Tesla is facing increased global competition, with China’s BYD overtaking it in EV sales during the quarter.
AutoNews recently reported that new Tesla U.S. vehicle registrations fell 25% in February compared with the same month last year. This marks the first decline since August 2020, which is before the availability of the company’s most popular model today, the Model Y. Despite this downturn, Tesla U.S. vehicle registrations still dominated the EV registrations from every other automaker in February. However, if Tesla EVs are excluded from the vehicle registration data, total U.S. electric vehicle registrations actually increased by 32%.
Many Tesla investors are impressed by the company’s commitment to an EV future and its portfolio of EV-only vehicles for sale. While this may be a noble endeavor, as EV sales growth is slowing, Tesla can offer no alternative vehicle powertrain choices to help prop up its business.
The growing EV industry in China is more beneficial to Chinese automakers than foreign car companies, including Tesla
Legacy automakers can withstand a slowdown in EV demand, even as many attempt to catch up with Tesla with their EV offerings. For example, Detroit automakers continue to sell highly profitable ICE trucks (internal combustion engin) and SUVs, giving them time to execute their EV strategies. Luxury German automakers like BMW concurrently offer EV versions of their popular ICE models, which continue to experience high demand. Toyota has extended its lead in hybrid electric vehicle sales even as demand for pure EVs slows in the automotive sector.
Is China a Friend or Foe to Tesla
The most important market for Tesla is China, which accounts for nearly half of its global vehicle sales. Today, however, Tesla faces substantial competition in China from local EV automakers like BYD, which is now outselling Tesla. Perhaps this was always the goal of the Chinese government, which provided Tesla with subsidies and tax breaks to launch in the country. Tesla helped China establish important supply chain infrastructure critical to Chinese EV-makers. Once EV supply chains were established and became efficient, the Chinese government has aggressively supported and subsidized local EV automakers irrespective of the impact on Tesla.
Consider the perspective of Chinese automotive expert Michael Dunne on the “sudden death” of Detroit automakers in China. Dunne noted that automakers, like General Motors, “made more money than God” in China through joint ventures with Chinese companies which were mandated by the government to access the Chinese market. Dunne recounted a past conversation with the Chinese Minister of Industry, who told him the Chinese were “biding their time, waiting for the moment when they could emerge independent and triumphant.” It seems this period of triumph is occurring now, with both legacy automakers and Tesla being victims of the strategy.
Tesla is an Automaker, not a Technology Company
In response to slowing EV demand, Tesla has lowered the price of its EVs in the U.S., Europe, and China several times. For those Tesla investors who insist that Tesla primarily is a technology company rather than an automaker, the act of vehicle discounting to balance supply with manufacturing capacity is a “very legacy automaker thing to do.”
Tesla once had profit margins that were the envy of the automotive industry. Today, however, the company’s margins are much like those of any legacy volume automaker, and nothing like the margins of a technology company.
Operating Margins - Automakers
Tesla 9.2%
Stellantis 12.1%
Toyota 11.1%
Operating Margins - Technology Companies
Apple 30.8%
Microsoft 44.2%
Nvidia 54.1%
Cybertruck: A Waist of Time and Resources
Many Elon Musk fans and Tesla investors assumed that the introduction of the comically styled Cybertruck would be a catalyst to reverse the company’s fortunes. Some even believed Cybertruck would challenge the dominance of Detroit automakers’ full-size pickup truck franchises.
Solving Full Self-Driving is the difference between Tesla being worth a lot of money or basically worth zero - Elon Musk
As I wrote last year, Detroit’s grip on the full-size pickup segment has proven resilient for years in the face of frequent new competition. Detroit automakers offer a full-size pickup for nearly every conceivable customer need, requiring engineering and manufacturing complexity that competitors find difficult to match. I predicted then that Tesla would experience the same challenges with Cybertruck that every competitor to Detroit’s pickup truck dominance has faced in the past. Thus far, my prediction seems correct.
Wall Street Wants New Strategic Focus from Tesla
Instead of wasting time and engineering resources on developing and selling the eccentric Cybertruck, Wall Street had hoped the company would focus on a high-volume entry-level EV, referred to by some as the Model 2, priced near $25,000. To investor’s dismay, Reuters recently reported that Tesla has halted development of this low-cost Tesla EV. The report also mentioned that Tesla is prioritizing the development of an autonomous robotaxi.
Following the Reuters article, Musk retorted on X, stating that “Reuters is lying,” without specifying any inaccuracies in the report. Later, Musk announced on X that a Tesla robotaxi unveiling is scheduled for August 8.
With an earnings call scheduled for April 23, analysts and investors like Daniel Ives and Ross Gerber are looking for reassurances that the Model 2 project is still alive. These stakeholders believe this vehicle is critical for the growth of Tesla shares, which have declined over 60% from their all-time highs in late 2021.
The Tesla Valuation Accelerant: Robotaxis
It appears these Tesla investors are overlooking crucial factors that affect the company’s valuation. A successful launch of the Model 2, priced at $25,000, would further establish Tesla as a high-volume automaker of EVs. While noteworthy, this narrative isn’t unique — it’s reminiscent of Toyota today, which sells 10 million vehicles per year, and currently enjoys better profit margins than Tesla. Simply put, a $25,000 Tesla would not enhance Tesla’s profit margins significantly. Therefore, what would make a future Tesla, selling 10 million EVs annually, significantly more valuable than Toyota? Realistically, nothing!
The only capability that could significantly elevate Tesla’s valuation is an autonomous robotaxi service. This could become Tesla’s equivalent of Amazon AWS - a revenue and profit stream separate from the lower-margin primary business of selling EVs.
If the August 8 robotaxi event is more about the announcement rather a robotaxi reality, investors should brace for a steep decline in Tesla’s share price.
Musk has stated in the past that “solving Full-Self Driving [FSD] is the difference between Tesla being worth a lot of money and being worth basically zero.” Investors who normally hang on every word from Musk, overlook this important insight. Rather than recognizing that a robotaxi business could allow Tesla to command technology company valuations, they stick to a belief that simply being a high-volume EV-maker would be more beneficial to Tesla than to automakers like Toyota, already offering a full line of ICE, hybrid and EV vehicles models.
A Pivotal Date for Tesla
The most critical upcoming date for Tesla’s future is not the earnings call next week as many assume. The most important date is the supposed robotaxi unveiling on August 8. Importantly, if this event is more about the announcement rather a robotaxi reality, investors should brace for a steep decline in Tesla’s share price.
Today, Tesla is an automaker, facing many of the same challenges as other car companies. Tesla is not a technology company, and therefore does not deserve a technology company valuation today. Yet, Tesla remains more valuable than Toyota even after losing over 60% of valuation since late 2021.
To be deserving of a technology company valuation, Tesla must transform into an actual technology company with high-margin to prove it. A robotaxi business could be the key to this transformation. Investors like Gene Munster seem to agree, recently applauding the company’s focus on robotaxis as “brilliant” and “gutsy.”
Unfortunately, I do not expect Tesla to resolve vehicle autonomy by August 8? Apple recently halted its efforts at developing an autonomous EV after years of development. Therefore, investors should tread carefully with Tesla stock as this crucial August 8 date approaches.
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Disclaimer
TaaSMaster, LLC is not a registered investment advisor or broker/dealer. All investment opinions expressed by TaaSMaster, LLC are from personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors may occur.