Tesla Inventory: Persevering with The Quick Guess (NASDAQ:TSLA)

Funding Thesis

I began a brief wager in opposition to Tesla (NASDAQ:TSLA) in July when shares have been round $280. I’ve described it in two earlier In search of Alpha articles, an preliminary one, the place I talked in regards to the rationale and the funding thesis, and a second article the place I gave an replace on the way it was going on the finish of October final 12 months.

I used to be up round 120% in October, however these positive factors have been lowered to 80% as Tesla shares have carried out comparatively effectively in November and December. The beginning of the brand new 12 months is an effective alternative to re-evaluate my funding thesis.

I wish to be very clear: I don’t doubt that firm fundamentals are stable and that Tesla has good long-term prospects. The issue is the valuation. Tesla’s market cap surpasses the ten largest international auto producers (by 2023 unit gross sales), however it’s not even considered one of them. BYD (OTCPK:BYDDF, OTCPK:BYDDY) offered extra EVs than Tesla in This autumn 2023 and it’s already amongst these 10. Not surprisingly, the bull thesis for Tesla increasingly relies on Tesla being “not only a automotive firm”.

Elon Musk lately posted this on X:

It is a daring assertion. In Q3 2023, 84% of income was within the automotive section. Up to now, Tesla has not delivered an AI or robotics product, and there’s no timeline for when it intends to ship one. For those who take a look at autonomous driving and FSD, it’s – in my opinion – not even clear what the product and the enterprise mannequin can be, past including a characteristic to a automotive.

It appears to me that just some days earlier Elon Musk had made it clear what the aim of the promotion was:

I believe Tesla is a automotive firm, and as a automotive firm, Tesla will do moderately effectively in 2024, however not effectively sufficient to justify a P/E ratio of round 100 (based mostly on the $0.53 GAAP revenue in Q3 2023). Due to the worth reductions in 2023, income progress in Q3 was simply 9%, and GAAP revenue was even 44% decrease than a 12 months in the past. Tesla’s revenue margins are actually according to different auto producers. Automobile deliveries have been nonetheless up by 38% in 2023, however it appears to be like like this may come down too in 2024, placing an finish to the 50% per 12 months progress aspirations.

The power enterprise, whereas stable, can’t compensate. So, this leaves autonomous driving, robotaxis, and the Optimus robotic as drivers for the valuation. We will count on monumental hype round these issues, however it’s removed from assured that we’ll see merchandise delivered anytime quickly.

I believe dangers are skewed to the draw back in 2024. Primarily based on this rationale, I intend to proceed the quick wager and have even determined to extend my stake.

Key dangers to the valuation and the bull thesis

Decreased progress

There isn’t a doubt that Tesla is rising. However is it rising sufficient to warrant the excessive valuation? Elon Musk stated that unit gross sales will develop by round 50% per 12 months. It ought to be greater than 50% in some years and fewer in different years, so the steering permits for flexibility.

Tesla reached its purpose to ship 1.8 million automobiles in 2023, with a report 484,507 deliveries in Q3, bringing the entire deliveries for the 12 months to 1,808,581, a YoY progress charge of round 38%. QoQ progress appears to be like much less spectacular, after 435,059 deliveries in Q3 and 466,140 in Q2. Q3 deliveries have been decrease as a consequence of upkeep shutdowns, so the Q2 quantity is the one we must always take a look at right here for a QoQ comparability.

Whereas the YoY 38% progress appears to be like spectacular by itself, it’s not significantly better than what Volkswagen Group (OTCPK:VWAGY) achieved, a automotive firm that definitely had its share of dangerous press in 2023. Volkswagen Group elevated BEV deliveries in 2023 by 34.7% to 572,500.

There isn’t a steering from Tesla but on 2024 deliveries, and this may in all probability be probably the most mentioned matters within the upcoming 2023 earnings name. It’s laborious to see (at the very least for me) the place progress within the vary of 30-50% goes to come back from in 2024. The Mannequin Y is the present gross sales driver, however the mannequin is changing into dated (it’s from 2019) and up in opposition to a wide range of newer fashions from different producers. Based on Bloomberg, greater than 100 new EV fashions will come available on the market in China alone this 12 months. Cybertruck gross sales can be negligible. There are rumors {that a} Mannequin Y revamp is deliberate for 2024, however now we have no affirmation from Tesla and accordingly no timeline. If the revamp is deliberate, quantity manufacturing will unlikely occur earlier than the second half of the 12 months. The obvious progress driver can be a brand new Mannequin 2, however that one may be very unlikely to come back in 2024.

Final quarter BYD overtook Tesla as the biggest vendor of absolutely electrical automobiles. BYD nonetheless sells most of its automobiles in China. Whereas Tesla is doing effectively in China, BYD is way bigger there. Volkswagen Group and Stellantis (STLA) outsell Tesla in Europe with their EVs. This growth is overshadowed by the recognition of the Mannequin Y. Throughout all manufacturers and fashions, Volkswagen Group has greater than 21% market share in Europe, and Tesla solely has 12%.

Tesla nonetheless guidelines the EV market within the US with round 55% market share. However is that this as a result of Telsa is so sturdy or the legacy automakers, particularly Common Motors (GM) and Ford (F), are comparatively weak? In This autumn 2023, GM’s EV share was simply 3.1%, and Ford (F) was not a lot larger at 5.3%.

Based on Forbes, the Swiss financial institution UBS forecasts EV gross sales progress between solely 10% and 15% in Western Europe and the US in 2024. It’s laborious to see how Tesla, though the one actual international participant within the EV market, will obtain a progress charge near 50% and even repeat the 38% progress in 2023 beneath such a situation.

Cybertruck won’t contribute to the topline in 2024

The Cybertruck has now been launched, form of at the very least. It won’t do a lot although for the supply numbers and the highest line in 2024, and it will likely be a adverse on the underside line at the very least till 2025.

The massive pre-release questions on the Cybertruck have been answered disappointingly, particularly because the worth has gone up considerably (which was anticipated) and the vary has come down (which was surprising).

On the constructive facet, traders appear to be fairly forgiving of Tesla, and the share worth didn’t undergo a lot. So, in some methods, I used to be mistaken right here. The disappointing Cybertruck launch didn’t push the share worth down. In the long run, Tesla should still make this a hit story – however it can in all probability not matter in 2024. The Cybertruck didn’t even characteristic within the newest quarterly manufacturing and supply quantity: what number of automobiles the corporate constructed and delivered in Q3 2023 is hidden within the “Different Fashions” class.

Authorities subsidies are being lowered

As I’ve stated in my earlier articles, the transition to electrical energy is to a big extent not market-driven however attributable to authorities insurance policies to fulfill a local weather emergency. Tesla, promoting solely electrical automobiles, has been and continues to be a serious beneficiary of assorted sorts of presidency subsidies, and that is the case in all three of its three giant markets, the US, China, and Europe.

Nevertheless, these insurance policies are pricey and are topic to vary. For my part, 2023 might need been the peak-subsidy 12 months. This isn’t excellent news for Tesla.

Only a few examples – each by itself may have a restricted influence, however collectively they’ll create vital headwinds for Tesla to develop deliveries:

• Within the US, a number of Mannequin 3 variants don’t qualify anymore for a $7,500 tax credit score. With battery elements from China, they can not fulfill necessities for native sourcing.
• In Germany, the biggest automotive market in Europe, budgetary points as a consequence of authorized restrictions have compelled the German authorities to desert subsidies in December. Even after a number of reductions, the worth per automotive was nonetheless round 4,500 euros. The subsidies have been in place since 2016 and in accordance with Handelsblatt (the article is in German) 376,000 automobiles have been backed in 2023. Tesla has a market share of round 10% in Germany (behind Volkswagen Group, Stellantis, and Mercedes), so this involves round backed 37,000 Tesla automobiles in 2023.
• In China, electrical automobiles have been exempted from a ten% car buy tax since 2014. This profit can be phased out. From January 2024, the utmost profit is capped at RMB 30000 (round $4220 on the present trade charge).
• The UK has already ended its Plug-in Automobile Grant scheme in June 2022. The outcome was that the expansion of EV gross sales has stalled in 2023. EV gross sales grew simply according to the general automotive market. Auto producers are topic to a authorities mandate to extend EV gross sales and are actually saying they can not do it with no tax minimize.
• Tesla can also be particularly affected by the European Union probe into whether or not China’s electrical car business is receiving unfair subsidies. The biggest exporter of automobiles manufactured in China into Europe is just not a Chinese language firm, however Tesla. France has already introduced restrictions on electrical automotive imports designed to scale back the variety of Chinese language EVs being imported. New guidelines favor automobiles manufactured domestically or elsewhere within the EU. The record of automobiles eligible for EV subsidies (the article is in French) contains the Mannequin Y, as it’s manufactured in Berlin, however not the Mannequin 3 which is imported from China.

Profitability is unlikely to enhance considerably

Tesla’s working margins in Q3 2023 have been 7.55%, the bottom since 2020, and greater than two share factors down QoQ. The corporate has prioritized quantity progress over income and revenue margins to extend demand. This has introduced Tesla to the purpose the place the beginning worth of a Mannequin 3 or Mannequin Y is lower than the typical worth of a automotive within the US.

It has additionally introduced profitability according to the place mass-market auto producers are. Toyota (TM) had a revenue margin of 11.6% in its final quarter. Volkswagen Group, which doesn’t say it’s a price chief and has a value financial savings program value a number of billion euros working, nonetheless got here to six.9% in Q3 2023.

One attention-grabbing information level relating to Tesla’s margins in Q3 2023 is that working margins have been coming down sooner (from 17.2% to 7.6% YoY) than gross revenue margins (from 25.1% to 17.9% YoY), that means Tesla’s price base is rising. This doesn’t assist the declare that Tesla has structural price benefits in comparison with different auto producers.

Another rationalization can be that Tesla’s price base is a results of the small mannequin line-up. Regardless of the declare from Elon Musk that “Tesla is an AI/robotics firm that seems to many to be a automotive firm”, analysis and growth bills are nonetheless low in comparison with different auto producers, regardless of the substantial current will increase. R&D bills in Q3 have been 1.1 billion US {dollars}, up 58% YoY, and round 4.9% of income. By comparability, BMW (OTCPK:BAMXF) (OTCPK:BMWYY) offered 2.3 million automobiles in 2023, which isn’t that removed from Tesla. Nevertheless, the ratio of R&D bills to income (excluding the monetary providers section) was considerably larger at 6.2%. Audi offered 1.9 million automobiles in 2023, so virtually the identical as Tesla. The R&D ratio in Q1-Q3 was even larger at 7.3%. And people two firms haven’t any aspirations to be greater than automotive firms. Regardless of the upper R&D price, their revenue margins are above Tesla, with BMW round 10% and Audi round 9%.

My level right here is that – in my opinion – it will likely be troublesome for Tesla to meaningfully enhance its revenue margins in 2024. Given the slow-down in EV demand progress, the rising competitors, and the dearth of recent fashions on Tesla’s facet, it doesn’t appear like Tesla will be capable of enhance costs. It even began the 12 months in China with additional worth reductions. Whereas decrease uncooked materials prices might present tailwinds, new mannequin growth, manufacturing unit ramp-ups, the Cybertruck ramp-up, Dojo, and many others. will in all probability enhance prices.

AI to the rescue?

Contemplating this, it’s no surprise that Elon Musk and Tesla bulls inform us that Tesla is greater than only a automotive firm. After all, there may be the chance that FSD, robotaxis, and robotics will drive income and income sooner or later. Elon Musk has at all times been good at convincing us that the long run can be significantly better than we think about. Whereas he has not delivered all the pieces he has promised previously, he has delivered loads.

However not everyone believes this anymore in terms of autonomous driving. Over the previous few years, he has predicted yearly that absolutely autonomous automobiles would arrive very quickly.

For Tesla to really obtain absolutely autonomous driving, as the corporate and Musk have promised, it should take duty for the system. At the moment, the driving force should supervise the system always. There isn’t a indication that this may occur anytime quickly, though Tesla wish to preserve calling it “Full Self Driving Functionality”. Not too long ago the corporate stated in courtroom that ought to be allowed to name the software program “Full Self Driving”, though it’s not that, as a result of it has used the title for thus lengthy that the California Division of Motor Autos has accepted the model title. Due to this fact, it shouldn’t be allowed to sue Tesla now for false promoting.

Musk has beforehand stated that FSD can be “popping out of beta” with the v12 replace, however we have no idea what that can imply.

The principle distinction with the Model 12 replace is probably going that car management is dealt with by neural networks somewhat than hard-coded by engineers, as was the case previously. There may be one factor I can be looking forward to. Being a totally completely different system, it ought to now additionally behave fully in another way – as a substitute of the incremental enhancements now we have seen beforehand.

I’m very to see how this performs out as soon as now we have extra data and information. Perhaps there can be a breakthrough and my funding thesis will show mistaken. We are going to see, however presently, I like my odds.

What’s my method and the way is it going up to now?

Since I dwell in Austria and am a retail investor, going quick straight on a US inventory is troublesome. I made a decision to go for Put choices with a length of 4 to six months and plan to repeatedly roll over the choices to the following 4 to six months at in regards to the midpoint of the length, so each 2 to three months. This comes with prices, so I don’t wish to do it too typically. I’ve accomplished it twice now since I began in July final 12 months.

The Put choices restrict my losses if issues don’t go effectively, however there may be nonetheless the opportunity of a complete loss. I made a decision to go for choices not fairly within the cash however with a strike worth no more than 10% beneath the share worth. This limits the loss charge, however on the flip facet additionally the leverage of the choices.

The choices I presently maintain have a strike worth of $240 and expire in June 2024. I intend to maintain them till someday in March. I reinvest positive factors but additionally scale back the reinvestment in case of a loss once I swap over. I’m now up round 80%; it was plus 120% final October, however Tesla shares have recovered considerably in November and December.

Dangers to the thesis

The choice to make use of Put choices means the timeframe for the thesis to play out is comparatively quick. Constantly switching to an extended length mitigates that threat to some extent however doesn’t fully resolve it.

Tesla inventory might be pushed significantly by sentiment and the thrill of future prospects alone. Something that drives up the inventory for just some months can scale back the worth of the choices considerably. That may occur rapidly, even when the choices technique is designed fastidiously.

Apart from sentiment, there may be the opportunity of an actual breakthrough in autonomous driving or robotics. Simply because Elon Musk has not but delivered on his grand guarantees, doesn’t imply he won’t ever ship. Constructive developments in different areas, just like the power storage enterprise or battery expertise, might have the identical impact.

Due to this fact, I’m allocating solely a small a part of my portfolio to this quick wager. I see it not as an funding, however as an attention-grabbing experiment.

Conclusion

Tesla’s present enterprise mannequin is to fabricate and promote automobiles, with an extra power storage enterprise. Greater than 80% of income is within the automotive section. Within the context of that enterprise mannequin, the present share worth can solely be justified if Tesla delivers the mix of continued excessive progress and revenue margins above business friends. This can be laborious to attain in 2024, however Tesla is valued larger than the ten largest automotive producers globally mixed. Accordingly, we’re seeing the bull funding thesis shift to the premise that Tesla isn’t just a automotive producer, however an AI and robotics firm. Nevertheless, Tesla has up to now not delivered a product in any of these two areas, and there’s no timeline for when it intends to ship one.

Due to this fact, I believe that threat for traders is skewed to the draw back in 2024, and I intend to proceed the quick wager I began half a 12 months in the past.

Editor’s Be aware: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please pay attention to the dangers related to these shares.