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On July 23, 2024
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[1]
Tesla: A Significant Shift In Risk/Reward Calls For A Pre-Earnings Downgrade (NASDAQ:TSLA)
The article discusses what to expect from Tesla's Q2 2024 report, including quarterly estimates and revision trends. Also, we will re-evaluate Tesla's long-term risk/reward. In light of its Q1 2024 report, I reiterated Tesla Inc. (NASDAQ:TSLA) as a "Buy" at $160 per share, citing its future growth prospects and compelling long-term risk/reward [5-year expected CAGR return of 15%+]: Based on fundamentals and technicals, I view Tesla's near-term risk/reward as skewed to the downside. In my view, investors with a 1-2 year investment horizon should continue to avoid Tesla. On the other hand, I like the idea of restarting accumulation for investors willing to look beyond a couple of years due to Tesla's favorable long-term risk/reward. At my investing group, we like to operate with a 5+ year time horizon, which is why we will restart slow, staggered accumulation in TSLA stock at our next bi-weekly deployment. To be clear, we understand that Tesla could drop more than 50% from current levels in the event of a hard landing. The plan is to dollar-cost average for the next couple of years even if Tesla keeps spiraling lower during this low-growth period for the EV giant. Key Takeaway: I rate Tesla a modest "Buy" at ~$160 per share, with a strong preference for slow, staggered buying over the next 12-24 months. Source: Tesla: Weak Q1 Report, But Cheaper Models Give Hope Since then, Tesla's stock has rallied up by ~55% in just about three months! Two big catalysts that have powered this move in TSLA are - 1) Elon Musk winning the shareholder vote on his $56B compensation package, i.e., removal of risk associated with Musk moving AI/robotics away from Tesla; and 2) Tesla recording better-than-feared delivery numbers for Q2 2024 [plus announcing a record high quarterly deployment of energy storage products: 9.4GWh] While Tesla's delivery volumes fell ~5% y/y in Q2, the EV giant experienced a significant jump in deliveries on a sequential basis (+14.8% q/q). With deliveries outpacing production by ~33K, Tesla seems to have reversed some of the recent inventory buildup, as projected by Tesla's leadership last quarter. As I see it, the inventory reduction will help propel Tesla's FCF generation back into positive territory. Now, Tesla is all set to report its Q2 numbers in after-hours on July 23; however, after going up from $160 to $250 per share in a flash, is TSLA stock still a "Buy"? Let's find out! While Tesla's stock has completely reversed a 40% YTD loss in a matter of weeks, the entire rally in TSLA has been driven by trading multiple expansion, with very little improvement in consensus earnings estimates over the past three months. Given Tesla's delivery numbers for Q2 beat consensus estimates, one would expect to see a rebound in Tesla's EPS estimates. While Tesla hasn't been cutting prices recently, the EV maker has been incentivizing consumers with discounted rates [e.g., 0.99% APR offer on Model-Y] to boost sales volumes. This is probably why Tesla's EPS estimates have failed to move up by much in light of its Q2 delivery beat. For Q2, Tesla is projected to generate $24.70B and $0.62 in revenue and normalized earnings per share, respectively. On the back of its vertical run-up from the mid-$100s to mid-$200s, Tesla's weekly RSI has raced up from ~30 ["oversold"] to ~70 ["overbought"]. Clearly, the sentiment around TSLA stock heading into the quarterly print is bullish. While a positive earnings surprise and/or (more) robotaxi hype can trigger an upside breakout, Tesla's stock appears primed for another technical correction, with the Q2 report likely to be a "sell the news" event. As we have discussed previously, Tesla is set to experience slower growth and continued margin pressures for the next couple of years: Our company is currently between two major growth waves: the first one began with the global expansion of the Model 3/Y platform and the next one we believe will be initiated by the global expansion of the next-generation vehicle platform. In 2024, our vehicle volume growth rate may be notably lower than the growth rate achieved in 2023, as our teams work on the launch of the next-generation vehicle at Gigafactory Texas. Source: Elon Musk, Tesla's Q4 2023 Earnings Deck Not much has changed on the fundamental/economic side, so I do not expect any explosive surprises in Tesla's Q2 report. The hype around the Tesla robotaxi has boosted sentiment around TSLA stock; however, with the robotaxi launch event already confirmed to have been pushed out to later in the year, momentum can unwind rapidly if Q2 earnings fail to justify lofty expectations. Based on our long-term growth [25% CAGR growth for the next 5 years] and steady-state FCF margin [20%] assumptions for Tesla, the rally from $160 to $250 per share has rendered TSLA stock a "Hold" due to a significant deterioration in its long-term risk/reward. At our previous assessment ($160 per share), Tesla's stock was undervalued by ~5%; however, at current levels ($250 per share), TSLA stock is overvalued by ~30%, and this is despite an increase in our fair value estimate for Tesla, which is up from $170 to $179 per share. Assuming a base case exit multiple of ~25x P/FCF, I now see Tesla stock going from ~$250 to ~$433 per share over the next five years at a ~11.6% CAGR. Since Tesla's 5-year expected CAGR return has dropped from ~21% to ~11.6% [well under our investment hurdle rate of 15%], I am downgrading Tesla stock to a "Hold" rating. In light of its recent run-up, Tesla's long-term risk/reward has deteriorated significantly. Considering its recent financial performance and uncertain business outlook, I view Tesla's near-term risk/reward as skewed to the downside. At TQI, we have paused the accumulation of Tesla shares ahead of its Q2 report, and I have no plans to get off the sidelines until TSLA's 5-year expected CAGR rises above 15%. Key Takeaway: I rate Tesla a "Hold" at ~$250 per share. Thanks for reading, and happy investing. Please share your thoughts, concerns, and/or questions in the comments section below.
[2]
Mobileye: Key Risks Remain Despite Strong Autonomous Driving Momentum Ahead (MBLY)
However, I recommend investors to monitor whether the company successfully handles its worrisome inventory problems. Thesis Mobileye Global Inc. (NASDAQ:MBLY) is an auto parts company that develops advanced driving assistance systems (ADAS) and autonomous driving technologies. As the company is one of the leaders in autonomous driving, I believe it will grab the attention of the market when the era of driving without human intervention truly starts. However, I recommend investors consider a few points before purchasing this stock, despite the sharp decline in its stock valuation after the first quarter earnings. Firstly, the company needs to prove that it is handling the inventory problem well. Secondly, the company's efforts to expand its customer base should be monitored Advanced Driver Assistant System & Autonomous driving When investing in Mobileye, I believe one of the important theses for investors will be its autonomous technologies and whether it can compete with Tesla (TSLA) FSD. To understand its underlying self-driving technologies, studying three points is important : REM (Road Experience Management), RSS (Responsibility Sensitive Safety), and True Redundancy. REM (Road Experience Management) is the company's approach to mapping, which is crowdsourced and updated continuously. Compared to the HD maps used by other autonomous driving companies, the company believes REM maps are more effective for self-driving. Thanks to the data sent by Mobileye-equipped ADAS vehicles, REM maps contain more information for driving, such as specific road situations at certain points, and are more scalable than static HD maps. I believe continuously updated maps are a significant advantage in autonomous driving. For example, when a road is blocked due to an emergency, a vehicle without this updated information may find it hard to drive, while a car using REM maps can. Moreover, the data burden is not huge, as it is sent in small data packets (10kb/km). RSS (Responsibility Sensitive Safety) is a mathematical model for safety in autonomous driving. The company believes that the government and the public should have a common understanding of the definition of safe driving in automated vehicles. One example is when drivers keep a safe distance from cars in front of them to prevent accidents. The automated vehicles on the other hand can be programmed with specific formulas to operate within a safe following distance. True Redundancy refers to Mobileye's approach to environmental sensing, whereby a camera only system and a lidar-radar system work independently and thus serve as back-ups to each other. As each system collects information from the environment and builds independent models, rather than having cameras and radar/lidar each sense certain elements of the environment and then combine them into one, it works better when one system fails. In my opinion, there are two big differences between Tesla and Mobileye's approach to autonomous driving. Firstly, Tesla focuses on a camera-only system for sensing to save costs, whereas Mobileye utilizes radar and lidar for more accurate sensing, which increases safety but also incurs higher expenses as radar and lidar are more expensive than cameras. However, as the production of radar/lidar increases and technologies develop further, it will become more affordable. Secondly, both companies have different perspectives on the necessity of HD maps. Tesla places less importance on maps and is trying to develop better vision sensing with the A.I. technologies and its supercomputer Dojo. For more accuracy in its model, Tesla utilizes data received from its cars all over the world to train the model. As the vehicle senses the environment and makes decisions based on the model, the need for accurate maps is not high. In contrast, as explained in above, even though Mobileye also trains its software with A.I., the company believes real-time updated maps are important for more safety. Without maps, vehicles with Mobileye solutions may find it hard to navigate, and Tesla will perform better. However, most people drive around areas where maps are already available, and in fact both systems would work well around the city I believe Tesla and Mobileye technologies related to autonomous vehicles have their strong and weak points. Competitions may be severe, but rather than just one solution dominating the market, both approaches would grow as the market develops. FSD is the well-known solution thanks to Tesla's popularity, but Mobileye is also contributing significantly to the development of autonomous driving technology. In other words, if autonomous driving becomes one of the catalysts for Tesla or other related stocks to rise, the company will definitely receive attention from the market. Overview of The First Quarter Earnings: Inventory Is The Problem Overall, compared to the first quarter of 2023, the revenue for the first quarter of 2024 decreased by 48% to 239 million dollars, and the gross margin dropped sharply from 45.2% to 22.6%. As its clients faced excess inventory problems because of supply constraints during the Corona pandemic and thus reduced their orders, the company experienced a drop in shipments of its EyeQ Chips. On the balance sheet side, even though it is highly unlikely that the company will face credit issues in the near future because it has no debts, its increasing inventories are a problem. From the fourth quarter of 2021, the inventory/asset ratio has increased from 0.6% to 3.0% in the first quarter of 2024. Moreover, inventory turnover, which I calculated using the cost of revenue, dropped from roughly 208% in the fourth quarter of 2021 to roughly 73% in the first quarter of 2024. In other words, the company became inefficient in turning inventory into revenue. Risk & Checklist For the Second Quarter Earnings The first risk is the inventory problem stated above, which should be monitored in the next earnings report. Increasing inventory can be a sign that the company is losing its competitiveness or that the market is in a downturn. One good news is that one of the main customers of the company's SuperVision solution, which has a higher margin, ZEEKR, recently announced that deliveries in June 2024 increased by 89% year-over-year. The Chinese EV market is showing signs of recovery, which is a positive indicator for Mobileye. Second, it is important to see whether the company can maintain its guidance. Despite the poor first quarter earnings, the management maintained the guidance for 2024, which is 31 million to 33 million EyeQ shipments and 175,000 to 195,000 supervision shipments. In other words, the company has to sell more EyeQ chips in the second half of the year. Third, even though it is not limited to the second quarter earnings, one important issue that investors should keep track of is the company's reliance on the Chinese market. The usage of the company's autonomous driving technologies is currently limited to a few Chinese models, especially ZEEKR. However, ZEEKR is also partnering with Nvidia to supply its chips for advanced vehicles. During the first-quarter conference call, management indicated that its customers would grow from four to six car models in early 2025 and 17 models, including Western OEMs, in 2026. Thus, it is important to check whether the company has succeeded in finding new customers in the upcoming earnings. History of Stock Performance and Valuation Even though I do not prefer using the P/S multiple in valuation because of its limitations in reflecting the margin profile of the company's business model, it is still useful for determining whether the valuation is undervalued when compared to historical performance In April 2023, the stock declined by more than 30% due to news that Tesla would cut its vehicle prices in China, which increased concerns about the Chinese EV market. During that period, the P/S multiple decreased to roughly 14. In June 2023, the company announced a secondary stock offering by Intel, which led to a drop in the stock price, and the multiple hovered around the 14.5 level. From July 2023 to January 2024, the stock traded within a limited range, between $33 and $44. However, following the announcement of the guidance for 2024 in January, the stock fell by more than 20%, and the P/S multiple dropped to approximately 9.2. Currently, the multiple is around 10.7. Based on the analysis of the company's stock performance history, I believe that, considering the company's earnings are likely to improve in the second half of 2024, negative news related to the company has been partially reflected in the stock price. I estimate that the bottom of the P/S multiple would be around 9, representing roughly a 15% drop from the current stock price. Conclusion When considering the low valuation and the momentum from autonomous driving, I believe the stock price is more likely to increase than to decline further in the coming years. However, since inventory problems and the expansion of the customer base are important indicators of the company's fundamentals, I recommend that investors monitor these factors in the upcoming quarters before making investment decisions. I'm an individual investor who has analyzed stocks since 2018 and focus on mid-caps. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Tesla faces a downgrade ahead of Q2 earnings, while Mobileye shows strong momentum in autonomous driving despite lingering risks. Both companies navigate challenges in the evolving automotive tech sector.
Tesla, the electric vehicle giant, is facing a significant shift in its risk-reward profile as it approaches its Q2 earnings report. Analysts at Barclays have downgraded Tesla's stock from "Overweight" to "Equal Weight," citing concerns about the company's future performance 1. This move reflects growing uncertainty in the market regarding Tesla's ability to maintain its impressive growth trajectory.
The downgrade comes amidst a complex backdrop of factors affecting Tesla's outlook. These include potential demand challenges, margin pressures, and increasing competition in the electric vehicle market. Investors and analysts are closely watching Tesla's upcoming earnings report for insights into how the company is navigating these challenges.
In contrast to Tesla's current headwinds, Mobileye, a leader in autonomous driving technology, is experiencing strong momentum in its sector. The company, which specializes in advanced driver-assistance systems (ADAS) and autonomous driving solutions, has been making significant strides in expanding its market presence and technological capabilities 2.
Mobileye's progress is particularly noteworthy in the context of the broader autonomous driving industry. As traditional automakers and tech companies alike pour resources into self-driving technology, Mobileye's advancements position it as a key player in this rapidly evolving field.
Despite Mobileye's positive momentum, the company is not without its challenges. The autonomous driving industry as a whole faces significant hurdles, including regulatory uncertainties, technological complexities, and public skepticism about the safety of self-driving vehicles. These factors contribute to a complex risk landscape for companies operating in this space [2].
For Mobileye, specific risks include potential delays in the widespread adoption of autonomous driving technology, intense competition from both established players and startups, and the need for continued heavy investment in research and development to maintain its technological edge.
The contrasting situations of Tesla and Mobileye highlight the dynamic nature of the automotive technology sector. While Tesla grapples with near-term challenges related to its core electric vehicle business, Mobileye's focus on autonomous driving technology represents a different facet of the industry's future.
These developments underscore the complexity of the automotive tech landscape, where companies must navigate not only traditional automotive industry challenges but also the rapid pace of technological innovation. As the sector continues to evolve, investors and industry observers will be watching closely to see how companies like Tesla and Mobileye adapt to changing market conditions and technological advancements.
Reference
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Tesla's Q2 results reveal a mix of challenges and potential growth areas. While facing pricing pressures and market competition, the company shows promise in AI development and robotics, sparking debates about its future trajectory.
3 Sources
Tesla faces headwinds in its core EV business while betting big on AI and robotaxis. Investors and analysts scrutinize the company's future prospects amid increasing competition and ambitious technological goals.
3 Sources
Tesla's energy business and autonomous driving efforts are gaining attention as potential growth drivers. Meanwhile, the company's stock performance and valuation remain topics of debate among analysts.
3 Sources
Tesla faces challenges in its pursuit of full autonomy while managing financial expectations. The company's stock performance and future prospects hinge on successfully navigating technological advancements and market demands.
2 Sources
Tesla faces mounting challenges as poor leadership decisions and increasing competition in the electric vehicle market raise concerns among investors. The company's stock performance and future prospects are under scrutiny.
2 Sources