Tesla's Challenges: Leadership Concerns and Competitive Pressures Weigh on Stock

Tesla: Poor Leadership And Mounting Competition Risks Causing Damage (TSLA)

Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More " I don't know about you, but to me, one of the most interesting things about the market is watching scenarios where share prices significantly diverge from fundamentals. As a long-oriented value investor, I love finding opportunities where a company is trading at a significant discount to its intrinsic value. But there is also a certain morbid fascination that I have with seeing the opposite, which would be a case where a company is drastically overpriced. One such example of this can be seen by looking at electric vehicle manufacturer Tesla (NASDAQ:TSLA). And the situation regarding the company has become even more severe over the last few months. You see, since I last rated the company a 'sell' back in April of this year, shares have skyrocketed by 35.6%. This is well above the 7% increase seen by the S&P 500 over the same window of time. However, it is worth mentioning that since I initially rated it a 'sell' in June of 2023, the stock is still down 9.3% while the S&P 500 has soared by 23.9%. The recent upswing seen by shares might be viewed by investors as a sign that the picture for the business is turning around. But based on my own observations, the opposite is true. The market is getting overly excited about a company that is not only struggling, but that will likely continue to struggle even more moving forward. In addition to this, significant concerns over the quality and incentives of Elon Musk should stoke in investors even more fears. In light of all of this, I have decided to take and even more aggressive step myself by downgrading the stock from a 'sell' to a 'strong sell'. This is a designation that I assigned stocks that either have significant fundamental or legal issues, or that are trading at massive premiums compared to what you would expect. Fundamentally speaking, things are not going well for Tesla. At a high level, we need only to look at financial performance seen this year compared to last year. In the latest quarter, which would be the second quarter of the 2024 fiscal year, the company reported revenue of $25.50 billion. This does represent a 2.3% increase over the $24.93 billion generated one year earlier. But this is really only because of certain non-core operations like the automotive regulatory credits that saw sales grow from $282 million to $890 million, its Energy Generation and Storage segment that reported a surge in revenue from $1.51 billion to $3.01 billion, and its services and other operations that reported a rise from $2.15 billion to $2.61 billion. All of these improvements are great to see. And management should be lauded for them. However, the core of the business, which would be its automotive sales category, reported a drop in sales from $20.42 billion to $18.53 billion. That's a 9.3% drop year over year. This was driven in part by a decline in the number of vehicles delivered from 466,140 in the second quarter of 2023 to 443,956 the same time this year. To management's credit, they did attribute around 13,000 of this decline to the early phase of the production ramp of the company's updated Model 3 at its Fremont factory. But considering that total deliveries during this time fell by 22,184, it's clear that there are other issues at play. This matter is made worse by the fact that this larger decline factors in around 4,000 additional deliveries involving the Model S, Model X, and Cybertruck, with most of that increase driven by the Cybertruck. The company also suffered from a drop in pricing. Management did not say by how much pricing changes impacted revenue. But they did say that it was the primary reason for the decline. As you can see in the chart below, financial performance for the first half of 2024 compared to the first half of 2023 is very similar to what we saw in the second quarter of this year relative to the same time last year. Even though the company is seeing growth in some parts of its operations, earnings and cash flows are plummeting as vehicle pricing drops and as the number of deliveries declines substantially. In fact, earlier, I stated that automotive sales revenue for the second quarter of this year was down 9.3% compared to the same time last year. But for the first half of this year as a whole, it was down a whopping 11%. This strikes that one of multiple problems that Tesla has on its hands right now. And that is the fact that the electric vehicle market is becoming increasingly competitive. As I detailed in an article regarding rival Rivian Automotive (RIVN) back in April, electric vehicle prices are quickly approaching parity with gas powered ones. According to one estimate, it's believed that by 2027, electric vehicle prices would be even lower than the prices of gas-powered ones. Regardless of your feelings regarding Elon Musk and the job that he is doing, he accurately pointed out in January of this year that the Chinese electric vehicle market poses a substantial risk to American vehicles. This is true not only in the Chinese market, but also here in the US. To compete with this, all electric vehicle manufacturers are going to start coming under pricing pressure. In fact, an article in Bloomberg from June of this year pointed out that there are now three electric vehicle producers with operations in the US that now sell their electric vehicles at a price that's lower than the average new vehicle. Specifically, this should be long-range electric vehicles (those with at least 300 miles of range on a single charge). One of these happens to be Tesla. But the other two are Hyundai-Kia and General Motors (GM). Contrary to some rhetoric that has developed over the past several months, the number of electric vehicles sold in the US is not declining. In the second quarter of 2024, there were 330,463 electric vehicles sold in this country. That marked an increase of 11.9% compared to the 295,355 sold the same time last year. But during this time, Tesla reported a drop of 6.3% in the number of electric vehicles sold throughout the country. In fact, the company's market share continues declining. In the second quarter, it was 49.7%. That was down from 52.1% in the first quarter and down from 59.3% in the second quarter of 2023. Other companies are doing considerably better. Hyundai-Kia reported a rise in market share from 7.3% in the second quarter of 2023 to 11.2% at the same time this year. General Motors saw a rise from 5.3% to 6.6%. And Ford (F) grew its market share from 5% to 7.2%. Even marginal players in the electric vehicle space are performing well. In the chart above, you can see the year-over-year improvement in market share for the second quarter for some of these firms. It probably doesn't help that Tesla is no longer viewed as the golden standard of the electric vehicle space. Car and Driver recently reported that only one of the company's models, the Model 3, ranked in its list of the top 9 best electric vehicles in the country. It came in at number 4. However, Edmunds did say that the Model 3 remains the second-best electric vehicle in the luxury category. So it would not be accurate to say that Tesla is down for the count. As far as the quality of electric vehicles goes, and the price at which it sells some of them, it is still the big player. In the past, Tesla was able to generate strong margins from its dominant, market leader position. But those days are likely gone. In the chart above, you can see the net profit margin for the company, as well as its operating cash flow margin, its adjusted operating cash flow margin, and its EBITDA margin, for the most recent quarter compared to the same time last year, and for the first half of this year compared to the first half of 2023. The fact that we are in the early days of increased competition in this space is disconcerting since further margin contraction caused by price reductions, not to mention the decline in production and deliveries, is almost certainly to occur moving forward. If shares of the business were trading on the cheap, I think I would be more open minded to the picture. But in the chart above, you can see how shares of the business are priced relative to earnings and adjusted operating cash flow. I also include the EV to EBITDA multiple. This chart includes historical results for 2023 and estimates for 2024. Since management does not provide any guidance for what earnings or cash flows might be for this year, the 2024 estimates were calculated by assuming that the rest of this year will look like the first half of this year relative to the same time of 2023. But even if we were to assume that fundamentals would end up reverting back to what they were last year, the stock is still incredibly pricey, especially considering the market dynamics that I already mentioned. To compound problems, Tesla's woes include non-fundamental factors as well. Some of the actions taken by Elon Musk can only be construed as reckless at best, or downright harmful to the company at worst. The first is the company's decision to award him a pay package of $55.8 billion. This plan originally dates back to 2018. Earlier this year, the Delaware Court of Chancery issued an opinion that stated that the award should be rescinded. Long story short, at the company's Annual Meeting of Stockholders, shareholders who were considered 'disinterested' ruled in favor of a pay package that would significantly increase Musk's ownership in the company. However, the next hearing on the matter to see if this will ultimately go through is set for August 2nd of this year. The dilution that investors would see from this would be significant. It would boost his ownership from 13% to roughly 25% if all goes according to plan. Unfortunately, he had to basically threaten the company into this position by saying that he was 'uncomfortable' growing the company by using AI and robotics if he did not have such a large ownership stake. Even stated that he would 'prefer to build products outside of Tesla' if it came to that. Although I am no attorney, this certainly feels like a breach of fiduciary duty to me. Another recent issue involves Musk's ownership over xAI, which is a company centered around the development of large language models and AI that is being developed to compete with other players like OpenAI and its ChatGPT technology. If this were just another side project like SpaceX, that would be one thing. However, he has been actively diverting AI chips from Tesla to go to xAI and Twitter, and hiring away employees from Tesla to work on the technology. This is in spite of the fact that xAI is not a subsidiary of Tesla. Add on top of this his decision to approach Tesla's Board of Directors with a proposal to have Tesla invest $5 billion into this project at a time when even he acknowledges the electric vehicle space is facing serious competition, and investors have every right to be worried. It's also worth pointing out that this kind of self-dealing has not exactly been all that profitable for the company in the past. Back in 2016, Musk had Tesla buy up another one of his companies, SolarCity, in a deal valued at the time at $2.15 billion. This was an all-stock transaction. But by the time you account for the current share price of Tesla and factor in the two different stock splits the company has seen, that transaction today equates to a value of $38.74 billion. For an enterprise that, since that time, has generated only $3.09 billion worth of gross profit for Tesla shareholders, it's clear that the deal has so far been harmful to the company. Admittedly, the Energy Generation and Storage segment this now falls under is finally starting to do really well. So the picture could ultimately change. But even allocating that capital to almost anything else would have been more profitable. The one saving grace that the firm may have at its disposal would be to get into the robotaxi space. This is a market that Musk himself has lauded. Furthermore, I have talked about it in prior articles, including in my article from April. But there are also significant risks and costs associated with a move in this direction. Fundamentally speaking, Tesla is facing some issues. The company also has other problems, mostly as a result of Elon Musk and rising competitive pressures. Add on top of this the fact that we are likely in the early days of this increased level of competition, and factor in how expensive shares are, and I absolutely think that Tesla warrants a 'strong sell' rating at this time.

Tesla Stock: Today's Dire Reality Or Believe The Hype? (NASDAQ:TSLA)

Optimus and FSD are key factors in Tesla's future, with potential for significant growth but also uncertainty and competition to consider. I've been studying Tesla (NASDAQ:TSLA) (NEOE:TSLA:CA) since it hit the lows of $120s back in January 2023, and the entire time I've been extremely undecided about whether the potential reward was worth the heavy risk involved in the investment. To the Tesla bulls out there, believing in the vision of Optimus, FSD, and the energy sector of Tesla comes very easily. However, my investment style requires lots of due diligence, supporting data to come to a decision. I currently hold Tesla at a "Hold" rating but encourage a lot of precaution because the current stock price does not justify at all where the company currently sits. The reason the company is priced where it is today because of the potential dominance of FSD and Optimus which Elon has managed to sell to people, despite any real data backing up his claims. However, the market is forward-looking and if we had the luxury of waiting to see what pans out with Tesla's robotaxi business, or Optimus production, before investing in the company, then we'd all do extremely well. Below, I share with you a snapshot of Tesla's Q2 earnings. Focus on the column on the right, which shows YoY % changes. It's pretty dismal, and looking at this alone makes it extremely difficult to justify today's current valuation of 43.3x 2024E EV/EBITDA. Does this look like a company that should have a FWD P/E of 100x? Most definitely not. However, investors are willing to pay a FWD PE of 90x because they believe the narrative of Elon and the picture he paints about just how big FSD, Robotaxis, and Optimus will be over the next 4-5 years. Let me break each one down and discuss today's reality vs the likelihood of the huge opportunity actually happening. I quote Elon Musk here below from Q2 Earnings call on July 23rd: Talking about FSD... ARK Invest thinks, on the order of $5 trillion. I think they are probably not wrong. And long-term Optimus, I think, it achieves a valuation several times that number Optimus is basically a humanoid robot that Tesla are building, initially focused purely on helping to perform tasks in the Tesla factory to automate a lot more processes. The longer-term goal of the Optimus robot is to sell to outside customers. I love this product, and watching videos on YouTube of Optimus performing pretty complex tasks is completely mind-boggling. However, I have 3 issues with it: 1. Maybe I'm less visionary than I should be, but I just can't see a world anytime soon where robots replace humans at work. Maybe this way of life does come at some point, but it's going to have to be a very slow, and gradual transition. 2. There is zero data supporting anything aside from pure hype that Elon has created (which admittedly he is extremely good at). All we know about Optimus is that production is planned to ramp up in 2026 by which Tesla plans to sell to outside customers. There is no data on costs involved, prices charged, or any form of profitability, or potential customers. 3. There's clearly solid competition from: Tesla aren't miles ahead or miles behind of these competitors at the moment and therefore the competition is real. On a more bullish note, I do not see the competition being too debilitating to Tesla over the long term. The reason I say this is because of Tesla's ability to leverage their manufacturing mastery, AI expertise, and capital raising skills. However, back to reality. The Robotics segment is a highly competitive space, especially for a company like Tesla, who are not solely focused on Optimus. Therefore, for me, currently Optimus should not be considered to add much to the Tesla valuation today just because it's all very up in the air. As I said, I'm aiming to be unbiased in this article and I am willing to highlight the other side of the argument where Optimus could add +$20 trillion to Tesla over the next decade or so. The reality is likely that +$10 trillion is too much, and my opinion is too little. But let's paint the other side of the picture. The future of labour is changing rapidly. Here are some well-supported projections by respected researchers: Current projections state that each robot will have a cost of $30k, and likely will generate $94k in recurring revenue (robots will be leased and not sold). At a projection of 1.5 million robots by 2030, this could translate in +$140 billion in revenue. If you see the labour market changing (and Optimus being one of the main beneficiaries of this change) then Tesla is one of the most obvious buys in the market. If, like me, you currently see this as more "hype" rather, then I'd avoid TSLA for now. What I do suggest though is that you keep an open mind. In the markets, things change very quickly and one bit of data from Optimus could essentially change the future of Tesla very quickly to the upside or downside. I feel like there's been a lot of hype around FSD over the last 3 months since ARK Invest gave a $2,600 price target for Tesla and said that FSD would account for 90% of the value of the company. FSD is something I'm a lot more bullish on (compared to Optimus anyway) because there has been proper data and upgrades to support the autonomy. I have no doubt that FSD (and robotaxis) will be a big part of Tesla in the future, but the unknown for me is as follows: 1. The timeline could be 15+ years down the road because of development of an FSD vehicle and also legislation is currently way behind. Even worse, the US is perhaps the most advanced globally in FSD legislation, which makes the international opportunity seem that much further away. It was only on March 7th 2024 that UNECE DCAS regulation was adopted to allow Beta testing for FSD vehicles to happen in Europe. Beta testing for FSD in America has been around since November 2022, so we have about a 1.5 year delay between legislation currently. 2. I believe the competition is being underappreciated, particularly from Waymo, which just received a $5 billion investment from Alphabet (GOOG). There's also competition from Uber (UBER) who are prepping themselves for the autonomous future. Therefore, I think it's irresponsible of ARK to suggest that by 2029 the Robotaxi business (currently valued at $0) will be a multi-trillion dollar business. Today's reality is that we have no management projections regarding FSD take rates, or anything alike. I sense we will begin to gradually know a lot more information over the coming months before the Robotaxi event on 10/10/24. Until then, it's a continued waiting game. The final point I want to make is that Tesla's core business (electric vehicles), which makes up 80% of profit today, is under tons of pressure. Chinese EV makers are pouring cash into R&D. For example, NIO (NIO) is currently allocating 29% of revenue to R&D compared to Tesla's 5.4%. And the Chinese market is loving the EVs, with 40% of all new car sales being EVs. That's creating a load of real-world data and feedback loops that Tesla is currently not benefiting from. The other danger is that China is adding cash subsidies of up to $2,770 for consumers who convert to EVs. The environment there is way more beneficial and makes it extremely hard for Tesla to compete. There's no denying that Tesla was the first mover, but the Chinese EV makers are now competing to completely disrupt the one core business that Tesla currently has. I realize this article definitely sounds on the more bearish side, but I think it's very important to be realistic with where Tesla currently is whilst also trying to paint a realistic picture of the future. Despite the realism that I've tried to portray in this article, there are of course reasons to be bullish, hence why the market is pricing Tesla at 100x PE. Firstly, the Robotaxi event has been scheduled for 10/10/24 which should provide investors with some data on FSD users, take rates, and revenue projections so that it stops just being a big guessing game. Secondly, Tesla's energy business is soaring, with Q2 gross profits up 200% vs Q2 2023. I didn't discuss energy at all in this article, but it's quite difficult to be bearish on Tesla's energy business post the stellar results shown in Q2. Overall, I do see Tesla as a very solid risk to reward investment, however, I think bullish investors out there need to appreciate the risk of the unknown a bit more than they currently are. Do I believe everything Elon Musk is saying about Optimus and FSD? I don't think so. But I do believe FSD will at some point be huge, and I also appreciate that I may be wrong with my predictions on Optimus. For now, I think it's important to sit on the sidelines with Tesla and just wait to see how everything settles before jumping onto the Optimus, FSD, Elon Musk hype train that is currently supported by very limited data.