TSLA Teeters on the Cliff’s Edge

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When Elon Musk speaks, the world listens.

The enigmatic billionaire created a brand and empire built on his successful image.

Working 120 hour weeks, he said that in the late part of the last decade, he wasn’t sure Tesla would survive.

Survive it did. Defying all odds, Tesla (TSLA) not only grew at double digits, but did so at a profit.

Today, the company spits out $13.85 billion in cash from operations and $6.9 billion in cash after capital expenditures.

When the company reported earnings last week, shares initially dipped in the afterhours before soaring the following day.

Searches by financial pros remained largely in line with the typical bump and decline around earnings.

However, that is unusual in and of itself.

You see, Tesla isn’t just any other company. Nor is Elon Musk any other businessman.

With so much news surrounding both of late, we thought it was worthwhile to review the company. 

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Tesla’s Business

It’s probably not a shock to anyone that Tesla makes electric vehicles.

Currently, the company produces several lines of retail consumer vehicles including the Model S, X, Y and 3.

Upcoming models including the cybertruck, semi, and others remain in development.

Initial production started in the Fremont, California facility. Manufacturing capacity has since expanded to Austin, Texas, in the U.S. Additionally, Tesla opened facilities in Shanghai, China, and Berlin, Germany.

Overall deliveries and revenues continue to climb at an astounding rate.

In the operational summary above, you’ll notice that the second half relates to solar and storage.

This comes from the nascent, yet growing energy generation and storage business since the company acquired SolarCity back in 2016.

What’s notable is that the segment has finally begun to turn a profit:

That’s a huge achievement for a business that struggled mightly for years.

This is also a massive untapped market that Tesla has yet to exploit truly.

Before we jump into the financials, it’s worth commenting on…well Elon’s recent adventures.

His bid to takeover Twitter was reckless and pointless. Altruism trumped business sense, putting Musk’s other ventures at risk, not the least of which from the way he structured the deal.

Other times it works out, as it did with Bitcoin, which is covered extensively in today’s issue of The Juice.

Then there’s his statements on the supply chain screw ups and looking recession. While that jives with the broader consensus, it flies in the face of the projections offered by Tesla’s recent quarterly results, where management reaffirmed its active growth.

One of the two is bound to be wrong. In this case, we think it’s management. And that’s leading to overdone expectations for the company in the near future.

Financials

Tesla’s revenue growth has been nothing short of miraculous. Once operations kicked into high gear in 2018, they never looked back.

In recent years, sales nearly doubled in 2021.

Management expects roughly 50% growth each year going forward.

At the same time, gross profits improved despite supply chain hiccups.

And operating income turned positive and continues to improve.

Yet, the improvements in cash flow are what’s truly eyecatching.

Operational cash flow more than quadrupled from 2019 to the trailing twelve months.

At the same time, capital expenditures have remained steady but well-managed.

Remarkably, the long-term debt sits at $2.25 billion, a small amount relative to the cash flows.

Valuation

It shouldn’t come as any surprise that Tesla’s valuations put the stock at a premium.

Price-to-earnings (P/E) ratios, price to cash flow…really all valuation ratios are somewhere in the stratosphere with the Space X rocket.

Yet, a 50% growth forecast can do that to a company.

In fact, that’s really what we’re looking at here – whether Tesla can meet the lofty expectations it set for itself.

There’s no question the company is well-run. Management knows how to ‘grow smart,’ balancing cash flow and growth simultaneously.

Other tech growth companies could take a page from Tesla.

Our Opinion 3/10

So, why then are we offering a 4 out of 10?

It all has to do with the current market and Tesla’s share price.

Many other growth companies have seen shares pummeled in recent months.

Year-to-date, shares of Tesla are down 22.72%.

Here’s the performance of several other notable large-cap tech companies:

• Amazon -26.57%
• Apple -13.22%
• Google -25.51%
• Meta -49.67%
• Microsoft -22.59%

True, none of these companies demonstrate the same growth as Tesla.

However, we cannot ignore Elon’s comments and how starkly they contrast to management’s forecast.

We believe Tesla’s growth will miss the current forecast, forcing a hard revaluation of a company that delivers profitability and cash but whose share price relies heavily on growth.

This isn’t to say the long-term outlook for the company isn’t bright.

At a minimum, we expect shares to fall towards $600 and as low as $400, 26%-51% below the current price.

The situation is not unlike the fall Netflix (NFLX) experienced in recent months.

We simply believe that the downside risk far outweighs the upside potential.