Is Big Money Ready to Break Up With Tesla?

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There’s no question – Tesla (TSLA) is the dominant electric vehicle maker.

But that’s not why investors love the stock.

Enigmatic CEO Elon Musk reengineered the entire automotive supply chain to deliver profit margins traditional players like Ford (F) and General Motors (GM) could only dream of.

Unfortunately, the economy has other plans.

Although sales were up 45.0% in YoY in the latest quarterly earnings report, they were down 7.3% QoQ, similar to what happened in Q1 of this year when sales dropped 6.0% QoQ.

Tesla dropped prices several times this year to move inventory, choosing to let its margins compress.

Is this a sign the selloff in Tesla shares isn’t over? Or is the worry overblown?

Tesla’s Business

With over 1.7 million deliveries last year, Tela is second behind General Motors (GM) and Toyota Motor (TM).

Tesla dominates the electric vehicle market, with a limited offering of luxury cars that can sell for less than $40,000 when credits are applied.

You may not remember, but Tesla’s acquisition of SolarCity, nearly a decade ago and highly controversial, also gave it a footprint in solar panels and battery storage solutions.

Plus, Tesla owns and operates a network of nearly 2,000 Supercharger stations.

Tesla segments its business into the following areas:

• Automotive (80% of total revenues) – The core of the business, this segment includes selling electric vehicles like Model S, Model X, Model 3, and Model Y, along with regulatory credits.
• Energy Generation and Storage (7% of total revenues) – This involves selling solar energy products and energy storage systems for residential, commercial, and utility-scale customers.
• Services and Others (13% of total revenues) – This umbrella category includes Tesla’s Supercharger stations, sales of used cars, and after-sales vehicle servicing.

Tesla’s autopilot systems garner quite a bit of attention. The semi-autonomous driving platform allows users to take their hands off the wheel.

Yet, despite promises from Musk, the systems haven’t reached a level of automation needed for city driving, let alone entirely driverless cars.

Financials

Source: Stock Analysis

No other car company grew as quickly as Tesla. 

Musk credits this to the unique factory setups and his push to open more gigafactories.

The company’s healthy cash margins allow it to reinvest in capital projects where other companies would struggle.

That’s why the company carries minimal debt, with over $26 billion in cash onhand.

One thing most people don’t realize is the total common shares outstanding grew from 2.9 billion in 2020 to 3.2 billion in the latest report. However, the total estimated potential shares is 3.5 billion based on the latest report, which isn’t much more dilution.

Valuation

Source: Seeking Alpha

On a traditional P/E ratio, Tesla might appear expensive. 

However, it’s the only one with a forward price-to-earnings growth (PEG), meaning it expects profits to rise.

On top of that, price-to-cash flow looks lofty at 54.2x. Yet, if the company keeps up with the 50% revenue growth rate, in two years, that number is essentially cut in half.

All of the other companies, except Nio (NIO), trade at fractions of their cash generation.

But we’ll soon see why.

Growth

Source: Seeking Alpha

Tesla’s growth is only matched by Nio, the Chinese EV company that’s questionable on its best days.

While other automakers forecast high single to low double-digit revenue growth, Tesla plans to pop off another +30% year.

What’s notable is the decline in free-cash-flow, attributable to Tesla’s intensive capital expenditures to expand the business. 

Profitability

Source: Seeking Alpha

And when it comes to profitability, no one matches Tesla. 

Toyota comes close. But if we look at operating cash flow as a percentage of sales, Tesla runs 12.7% while Toyota is just 9.1%.

Remember that Tesla’s numbers are down recently as it’s cut prices.

Our Opinion 8/10

It’s hard not to love Tesla, especially if you’ve ever driven one.

The company’s the best at what it does. And that isn’t changing anytime soon.

While shares are volatile, and we expect they could trade anywhere between $100-$300 (yes that’s a wide range), it’s a good time to start dipping your toes into the stock on pullbacks.

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