Tesla is just a car company, and it’s time Wall Street said so

There are few constants on Wall Street. But one thing investors can always count on is the next big trend to watch. For much of the past five years, Electric vehicle (EV) High on the list of game-changing innovations.

Fortune Business Insights predicts that the global electric vehicle market will grow at a compound annual growth rate of nearly 18% through 2030, although this varies widely, as you would expect from predictions of any industry-changing technology. By the turn of the century, we could be talking about annual sales of nearly $1.6 trillion.

Currently, North America’s leader in electric vehicles Tesla (NASDAQ: TSLA) Set the trends (pardon the necessary pun). Led by outspoken CEO Elon Musk, Tesla has launched five production models (3, S, Y, X and Cybertruck) and expanded into energy, storage and Various fields. services, including its Supercharger network.

A Tesla charging station is in the foreground, and a Tesla electric vehicle is plugged in for charging in the background.

Image source: Tesla.

Although Tesla is viewed by its shareholders as a Artificial intelligence (AI), tech and car manufacturing companies merge into oneand I’ll show you why it’s nothing more than a car company that should be taken seriously by Wall Street.

Tesla breaks the automaker mold

Before we dive into Tesla’s problems and Wall Street’s lofty valuation of the most valuable automaker, let me give the company the credit it deserves.

Tesla became the first car company in more than five years to go from scratch to mass production. This is no accident. Although it spent a lot of money, Tesla has already seen the Model Y sports utility vehicle. The car has become the world’s best-selling car, according to the company’s own preliminary figures.

In addition, Tesla has become the only pure electric vehicle manufacturer to generate recurring profits under generally accepted accounting principles (GAAP). On Wednesday, January 24, the company reported its fourth consecutive year of GAAP profits. Traditional automakers often generate substantial profits from their internal combustion engine vehicles, but suffer losses from their electric vehicle segments.

I would also add that investors appreciate the innovation that Elon Musk brings. He was responsible for the launch of the Models 3, S, This is questionable.

Let’s face it: Tesla is just a car company

But that brings me back to the issue at hand, which is Tesla’s valuation.A market capitalization of approximately $661 billion is equivalent to combined Market capitalization of many of the largest automakers. The basis for Tesla to maintain this ultra-high valuation is that it is a technology company driven by artificial intelligence. But dig deeper into its operating performance and history of delivering on Musk’s promises, and you’ll find that’s not the case.

For example, Tesla achieved total revenue of $96.8 billion in 2023. Only $6 billion of that came from its energy generation and storage unit, with another $8.3 billion coming from its “services and other revenue.” This means that 85% of the company’s revenue comes from selling and leasing electric vehicles.

as a company Amazon (NASDAQ: AMZN) It has been shown that it is okay for ancillary operations to do the heavy lifting in terms of operating income and cash flow. While Amazon generates most of its revenue from its online marketplace, the majority of its operating income and cash flow comes from its world-leading cloud infrastructure services segment, Amazon Web Services (AWS). AWS accounts for only one-sixth of Amazon’s net sales, but in some quarters accounted for all of Amazon’s operating income.

However, Tesla’s ancillary divisions are mostly for show, at least from an operational standpoint. While total energy storage (measured in megawatt (MW) hours) deployed in 2023 is up 125% from a year ago, solar deployment (measured in megawatt (MW)) is down 36% from 2022 . Although power generation and storage revenue increased 10% in the fourth quarter from a year ago, it was lower than reported in the first, second and third quarters of 2023.

In addition, service revenue in the fourth quarter was US$2.166 billion, which was the same as in the third quarter, and the gross profit margin was only 2.7%. Once operating expenses are taken into account, neither generation and storage nor services do anything to move Tesla’s needle.

An all-electric Model 3 sedan drives on the highway in winter.An all-electric Model 3 sedan drives on the highway in winter.

The Model 3 is Tesla’s flagship sedan. Image source: Tesla.

Tesla’s car business faces growing headwinds

The painful truth for Tesla is that it’s more or less a run-of-the-mill automaker facing growing headwinds in a highly competitive industry.

Starting in early 2023, Tesla began to significantly reduce the prices of Model 3, S, X and Y. While optimists believe these price cuts are strategic and based on improving production efficiency, Musk noted at Tesla’s annual shareholder meeting in May that the company was cutting prices in response to demand. Weakened demand, coupled with rising global inventories, has cut Tesla’s operating margin by more than half (from 17.2% to 8.2%) since September 2022.

If Tesla’s operating margins are better than those of other auto stocks, then it could be argued that it deserves a premium valuation. But most time-tested traditional automakers have operating margins of about 8%, a percentage point either way. Despite modest operating margins, Tesla’s forward price-to-earnings ratio is still 10 times the industry average.

Beyond that, a large portion of Tesla’s pre-tax income comes from unsustainable sources. You would expect an innovative, high-growth company to grow organically by selling its core product. In the case of Tesla, I’m talking about selling electric vehicles and, to a lesser extent, generating profits from the ancillary segments mentioned above.

In the fourth quarter, Tesla made $433 million in profit from selling free vehicle regulatory credits provided by the government. It also netted $333 million in interest income from its large cash hoard. The world’s largest electric car company by market capitalization earned 35% profit. Fourth-quarter pretax income of $2.191 billion came from the sale of tax credits and cash interest. This can hardly be called “innovation”.

To make matters worse, Elon Musk has a terrible habit of overpromising and underdelivering on new cars and innovations. For example, not only has the launch of the Cybertruck been delayed, but its production is expected to be slower than Tesla’s other models due to the vehicle’s complexity.

Other examples of failure to deliver include Musk’s now annual promise to achieve Level 5 autonomy “a year from now” and Musk’s 2019 comments that his company would have 100 autonomous vehicles “by the end of next year.” Thousands of robotaxis are on the road. While Tesla’s side projects (e.g., Optimus Prime robots) can make for interesting talking points, they don’t provide any tangible value to the business.

TSLA P/E Ratio (Forward) ChartTSLA P/E Ratio (Forward) Chart

TSLA P/E Ratio (Forward) Chart

Most auto stocks are valued at 6 to 8 times forward earnings, which would put Tesla’s stock price in a range of $22 to $29, based on Wall Street’s consensus for Tesla entering 2024 of $3.67 a share. The auto industry was flat. While some argue Tesla deserves a higher premium than traditional automakers given its first-mover advantage in electric vehicles, the company’s operating performance and history of failing to meet production and demand are The three-digit share price is simply unsustainable. Innovation goals.

It’s time to face the fact that Tesla is just a car company and that Wall Street should take it seriously.

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John Mackey is the former CEO of Amazon subsidiary Whole Foods Market and a board member of The Motley Fool. Sean Williams There is a position at Amazon. The Motley Fool has positions and recommendations at Amazon and Tesla. Motley Fool has disclosure policy.

Tesla is just a car company, and it’s time Wall Street said so Originally published by The Motley Fool

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