Tesla: From Disruptor to Just Another Automaker?
In October 2021, I wrote that Tesla's massive valuation might be justified. At that time, Tesla was valued at $1.1 trillion,close to its all-time high. Only four U.S. companies were worth more - Apple, Microsoft, Alphabet, and Amazon. I owned Tesla stock then, believing that traditional metrics of valuing a company did not apply to Tesla.
In 2020 I described how Tesla’s core competencies were unmatched by rivals written in an earlier article. I believed that Tesla had established substantial advantages over every competitor in vehicle engineering. Importantly, I assumed that Tesla would use its lead in artificial intelligence and machine learning to swiftly commercialize autonomous driving systems, potentially tapping into a $10 trillion industry.
I Was Wrong
It's clear: Tesla is primarily an automaker. Over 80% of its revenue comes from its automotive business, a fact that has always been true. Tesla flourished when interest rates were near zero, competition in the EV space was minimal, demand exceeded manufacturing capacity, and the company could raise prices with few limits. This created a facade that obscured the realities of its business model for those focused on growth and its impressive 2022 operating margin of 16.8%.
Today's business environment is vastly different. Money is no longer nearly free, competition in the EV space has grown tremendously (particularly in China), and Tesla's production capacity exceeds demand. Price cuts are now a tactic to stoke demand, and there have been multiple rounds of layoffs to manage costs. The once-impressive operating margin plummeted to 5.5% in the latest quarter – significantly lower than legacy automakers like Toyota and even General Motors.
Even Tesla's direct sales approach now hinders the company. As I wrote recently, legacy automakers benefit from franchised dealer systems in this economic environment because dealers help offset pricing pressure. Tesla, however, must directly adjust production in response to consumer demand. Legacy automakers manage fluctuations in demand more efficiently, while Tesla bears the full cost of unsold inventory – a cost distributed throughout dealer networks for its competitors.
At $180 per share, Tesla is valued at $577 billion – 50% higher than Toyota. The only world where this makes sense is one where Tesla becomes more than just an automaker. Tim Higgins of the Wall Street Journal recently wrote that Elon Musk wants to “change the Tesla solar system” by turning the company into an autonomous technology firm producing humanoid robots and operating a self-driving robotaxi business.
Investors who once believed Tesla would dominate profits in the global vehicle sector are now forced to hope for success in these ambitious ventures. However, investors betting on this non-automotive growth may face disappointment for many years.
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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.