I have been quite bearish for TSLA for some time and the latest one was summarized in the early Mar blog:
Can we trust this bullish run for TSLA?
Why Tesla is down after reporting Q1 earnings
Price cuts based on demand being weaker than production
Tesla traded down 4% after reporting first quarter earnings yesterday after the close another 2% after the conference call, mainly because investors are realizing that things are not going to improve for at least the next quarter or two – and quite possibly worsen.
Let's backtrack for a moment to see the setup to the quarter.
Tesla traded down dramatically last November and December, falling by half to a low of around $110 at the end of December. At the time, this had more to do with Twitter than Tesla, even though Tesla's fundamentals had started to deteriorate too, but only in China – not so much in North America or in Europe.
Then, Tesla started cutting prices in all geographies in early January – close to 10%-15% on a weighted basis. All other things equal, that ought to have tanked the stock dramatically, taking it to new lows well below $100.
Yet, the opposite happened. The stock nearly doubled in January and into February for no sane reason whatsoever. It is really hard to explain why this happened, when the new data so obviously suggested that Tesla was having a severe demand problem and had to sacrifice profits in order to keep sales up with production.
Mind you, automotive production is not something that can be cheaply adjusted up or down on short notice. The supply chain is complex and requires many months of painful adjustment to do so. In this case, Tesla can't just reduce production on a whim when it faces demand that falls short of its previous planning.
As a result, Tesla did what other car companies always had to do in situations like this (think General Motors in 2008, for example): cut prices again and again. The latest price cuts happened just this week.
Let's forget the specific numbers Tesla just reported for a moment – margins, cash flow, etc. Yes, most of them were weak relative to expectations. What really sank the stock, however, was that there seemed to be no relief on the way. A usually upbeat management had no credible plan for why investors would be rewarded with a shift in trend lines in the near term. Basically, any continued softening of demand may force them to cut prices again… and again…
Investors are now starting to realize that more price cuts are likely because there is no other way to address the problem of softening demand. Sales, earnings, margins, cash flow – almost all metrics will continue to deteriorate in Q2, Q3, and possibly beyond. Earnings estimates will likely fall, and not just for 2023 but also for 2024.
This is Wall Street 101: if growth rates are reduced, and some key metrics are no longer even growing at all, but rather outright falling from the previous year, the multiples assigned to the company will normally also fall. This will be particularly acute for the market's most mo-mo previously-hypergrowth company (think AOL after January 2000).
If Tesla won't earn more than $2.50 or so per share this year, and things don't look much better for 2024, then if it were a regular automaker, the stock might be assigned a multiple of 5x to 10x at most, meaning it would trade in the $12 to $25 range. Yet, the stock closed on Wednesday at $180.59 (it dropped below $170 after the conference call).
Investors looking for excuses to sell are finding other reasons too…
Tesla's main problem is that, no matter the geography, competition is growing stronger every day with more new all-electric cars than I can keep track of.
Just this week, the Volkswagen ID.7 debuted, and it is the closest thing to a Tesla Model S yet to hit the market – a large hatchback:
Range should be somewhere over 300 miles, but the price may be closer to the smaller Tesla Model 3 sedan than the larger Model S hatchback.
In any case, there are so many new all-electric cars hitting the market that it's impossible to remember them all, especially when you include China. Still, for those of you spending all of your time inside the 50 states, you have not yet seen the Volkswagen ID. BUZZ – the all-electric minivan:
The consumer now has most exciting all-electric choices in all shapes and sizes, and this all helps to explain the headwinds that are causing Tesla to have to cut prices incessantly in order to move the metal.
I am short Tesla and while I think the potential is for a 95% decline in the stock, I imagine that in the near term – one or two quarters – it could realistically fall by 50% from here.
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