Elon Musk is not a typical ordinary person. He is a genius. As such, it is also difficult to use conventional ways to evaluate his companies. I have given up trading TSLA based on conventional wisdom but more on its TA setup at a time. So I'm not a bull or bear for TSLA. I'm just a speculator for it. Below is what I shared with my DW Family. Just a few short days, TSLA has shot up nicely. So we have harvested half of the gain from the naked put today and we are still in the game with our call options. Will see how far it can go with this rebound.
I posted a very bearish case a while ago for TSLA. For balance, here is a bullish case for TSLA
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As promised in my last email, here is my analyst Kevin DeCamp’s bull case for TSLA:
Tesla investors shouldn’t be surprised by the way the market reacted to its first quarter earnings. Gross margins came in well below CFO Zack Kirkhorn’s projections from just a few months ago and he made it clear we have likely not seen the floor in these numbers (now below the 20% minimum he projected). Even worse, Musk claimed that Tesla has the “uniquely strong strategic position because we’re the only ones making cars that technically we could sell for zero profit for now, and then yield actually tremendous economics in the future through autonomy.”
So Tesla’s recent market-leading operating margins could potentially go to zero or negative and that is the advantage? Long-term Tesla bulls understand what Musk is getting at here, but nobody should be surprised that Wall Street didn’t like this.
Before we revisit the pricing issues, let’s discuss the positive developments:
Tesla’s in-house battery 4680 production ramp appears to be gaining steam as per CTO Drew Baglino’s comments on the call. More evidence for this can be seen by Tesla’s new Model Y trim finally available for order, which includes these 4680 cells in structural packs manufactured in the Austin, Texas factory.
These 4680 cells are crucial for the Cybertruck launch and I believe this was the major factor causing the truck’s delay since its 2019 debut. It is currently being manufactured in Austin on a pilot line (see photos in the earnings deck) and is scheduled tentatively for a late third quarter delivery event this year.
Love it or hate it, the Cybertruck is going to change the look of our roads and will generate such a buzz that Tesla will likely continue its run of not needing traditional advertising. In addition, this will expand Tesla’s total addressable market substantially, helping the company maintain its long-term growth targets.
Tesla’s energy business is growing fast with energy and storage revenue up 148% YoY, from 3.3% up to 6.6% of total revenues. With Tesla’s “Megapack” factory in Lathrop, California continuing to ramp production and its new Shanghai Megapack factory soon to be up and running, Tesla Energy will continue to grow faster than the auto segment and will eventually rival its size. With a business line less susceptible to macroeconomic headwinds and a huge backlog with the world’s push for renewables, the energy segment will be a massive business that Wall Street will eventually have no choice but to give Tesla credit for.
In response to an analyst question regarding opening Tesla up to new markets, Musk said that “it’s high time that Tesla offers its cars to the rest of the world, and that is something that we intend to do.” Although bears will likely look at this as more evidence that there are demand issues, I see it as a great use of its lowest cost of production Shanghai plant export hub and laying the groundwork for its next phase of growth (especially the generation 3 platform). With $22.4 billion in cash, Tesla has the resources to invest in the next phase.
Now, for the bad news.
I don’t think I’ve ever heard Tesla’s management so negative about the macro environment on an earnings call. This is a very “uncertain” environment, margins are very “difficult to predict,” “I don’t have a crystal ball,” etc. The tone of the call did not instill confidence. It’s almost as if Tesla was trying to reset expectations and prepare investors for the worst.
Analyst 2024 earnings estimates have been cut (red line below) and the big question that investors have is how much lower will they go? Will this be a permanent step-down in margins or a temporary blip during these “uncertain” times? If Tesla’s margins remain closer to legacy auto companies, why should it trade at a much higher multiple?
This quarter reminded me of the first quarter of 2019. Tesla had recently cut prices and announced they would not make a profit as the older $7,500 federal tax credit was cut in half. Along with this, they announced they would close a bunch of stores to focus on online purchases, which came across in the media as desperation. At the same time, Tesla was starting to focus on selling its lower-priced Model 3 trims, which further pressured margins.
The “demand cliff” talk from bears was at full steam as Tesla only sold 63,000 cars, lost $702 million, and ended the quarter with $2.2 billion in cash. The company reaffirmed its guidance of 360,000-400,000 total vehicle deliveries for 2019 (delivering 367,500).
Fast forward to today, and Tesla had a GAAP income of $2.5 billion in the first quarter – more than its total cash balance four years ago and delivered 422,000 vehicles – 15% more than it delivered in all of 2019. And don’t forget, this was a disappointing quarter – even for us Tesla bulls.
Another thing to remember about 2019 is that nobody foresaw what came in 2020 and nobody really knows what 2024 will bring, but that’s what makes the stock market game fun (and the only reason you actually have a chance to make money).
If you still have confidence in the Tesla team and its ability to deliver on its mission and FSD, this year may be a time to add to your position or start a new one as the uncertainty – and volatility – is likely to persist. But you need to do your homework, have conviction, and understand the risks.
I know I will be adding to my position and am confident that we will likely look back in four more years at these “tiny” delivery and profit numbers when Tesla is a much bigger auto, energy, AI, and robotics company.
EV market share is one of the media’s obsessions – among many other dumb things – but what really matters is total market share of the auto market (see below chart). As the world continues to wake up to the fact that the hundreds of millions of cars on the road will be obsolete, who will benefit most?:
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