Tesla: Fair Value Could Be Under $50 Per Share (NASDAQ:TSLA)

In my previous article on Tesla, Inc. (NASDAQ:TSLA), I warned about a potential downside that would continue beyond early 2024. Since then, the stock has lost about 22% in value, underperforming the S&P 500 (SP500) by a wide margin.

The problems present in Q4 2023 – or more generally over the past two years – continue to go unresolved, and I believe this company is gradually losing investor confidence.

Even in this quarterly, it was unable to beat estimates, despite being revised downward from previous years:

• Non-GAAP EPS of $0.45 misses by $0.05.
• Revenue of $21.31B (-8.5% Y/Y) misses by $950M.

As I write this article the day after the release, the stock after the release of the quarterly report is gaining +10%, but as far as I am concerned, that is completely irrelevant. I remain confident about my strong sell rating, and I believe Tesla’s fair value is much lower than its current price.

Q1 2024 Highlights

Since most major car companies do not have double-digit P/E ratios, I expect Tesla to grow faster than average, since its P/E is 30x. Yet, for the umpteenth quarterly, this is not the case.

• Total automotive revenues in Q1 2024 reached $17.37 billion, down 13% from the same quarter last year.
• Energy generation and storage revenues amounted to $1.63 billion, up 7% from the same quarter last year.
• Services and other revenue amounted to $2.28 billion, up 25% from last year.

In light of these results, it is clear that the alternative segments (Energy & Storage; Services) are not growing enough to offset the reduction in automotive revenues. The bullish thesis on Tesla relies heavily on their long-term growth, but I wonder how much longer we will have to wait before their weight becomes relevant. In terms of revenues, the dependence on the automotive segment is decreasing, which is good, but this trend is mainly due to the slump in car sales, not because the other segments are performing brilliantly.

Be that as it may, the 9% decrease in total revenues from last year is a secondary issue to the collapse in operating margin.

Total gross profit was $3.69 billion, down 18% from last year. This figure was already in steep decline in previous quarters, but has been getting worse since the release of Cybertruck. The latter will weigh on the company’s margins for much longer before it becomes profitable, assuming it will ever be. By the way, a problem with the accelerator pedal was recently found, and almost all Cybertrucks circulating in the United States will be recalled. In other words, a nightmarish start for a vehicle that had very high expectations.

Operating income plummeted even more, or 56%, and reached $1.17 billion. The many investments, including $1 billion in AI infrastructure, weighed in this figure. Operating margin has more than halved from last year and is just 5.50%.

If previously investors were willing to pay a premium for Tesla due to strong growth and higher margins, I don’t think this investment thesis is valid anymore. Free cash flow in Q1 2024 was actually negative (-$2.53 billion), and it was not only because of high CapEx ($2.77 billion). Cash from operations was only $242 million, and without stock-based compensation – the highest in a year – would have been -$282 million.

The Tesla brand has suffered a severe backlash, and fierce competition is gradually weakening this company.

Total deliveries are down 9% year-on-year, and Tesla was forced to make another price cut a few days ago. If sales decline, settling for selling at a lower price is the only alternative, but this reduces revenue per vehicle. Moreover, by reducing the average price per car, Tesla risks clashing with the Japanese and Chinese giants that dominate the lower and middle price ranges.

In China, the Model 3 price has declined by £1,562; in the U.S., Model Y, Model X and Model S cost $2,000 less. There have been other declines in Europe, Africa and the Middle East as well. In short, more and more people are realizing that Tesla is not the only brand available when it comes to electric vehicles, and many others are realizing that it will be a long time before combustion engines become an old memory: the transition to electric is proving to be much more complicated than predicted. Subsidies are still a major incentive for demand.

Market share in major markets, particularly China, is distressed compared to the past and, in my opinion, is set to collapse further. In the history of the automotive industry, no company has been able to clearly dominate over its competitors, because the nature of this market is fragmented. Today, with the entry of Chinese companies such as Nio (NIO), Li Auto (LI) and BYD Company (OTCPK:BYDDF), I do not see how Tesla can continue to be the first choice. It can only hope that these cars do not spread outside China, as they are priced very cheaply while having cutting-edge aspects.

China’s auto industry has improved exponentially lately, and the government supports its companies at the expense of foreign ones – after all, tension between China and the U.S. is at an all-time high. In 2023, 22% of Tesla’s revenues came from China, and this is, in my opinion, an important factor to consider. If the company cannot rely on the world’s most important EV market in the coming years, its overall growth will suffer.

Overall, this quarterly report once again showed the weaknesses of previous ones and fueled my belief that this company represents one of the largest bubbles in history. My expectation is that eventually it will become a car company like any other and that its multiples will be greatly downgraded, as will its valuation. In some cases, I have read theses that it might go bankrupt, but I find them quite ridiculous for now. Tesla remains an excellent company in its field, the problem is only the valuation.

How much is Tesla worth?

In the last few articles, I have only commented on the quarterly results, but now I would also like to update my valuation regarding this company. To calculate its fair value, I will use a discounted cash flow (“DCF”) model consisting of the following inputs:

• The estimated free cash flow for 2024 will be that of 2023. Probably this year’s will be lower since the first quarter already started with a -$2.53 billion, but I wanted to be optimistic. Also, I considered an annual growth of 15% until 2033, which seems far too positive. Let’s not forget that both revenues and profit margins are declining sharply from quarter to quarter.
• The required rate of return considered is 10% per year: again, I was very optimistic. 30-year T-bonds yield almost 5%, so I am only considering a 5% equity risk premium for a company with a volatility comparable to a cryptocurrency. What’s more, operating in a highly competitive market where no one has ever been able to clearly prevail over peers. In such a situation, I would normally use an RRR of at least 12%.

The result of these assumptions is rather discouraging. In fact, Tesla is shown as having a fair value of $46 per share. Yet, I have been anything but catastrophic in the data entered. To justify the current price per share, the CAGR would have to be 35%, a totally unrealistic growth in my opinion.

Conclusion

Tesla is a great company, and no one can say otherwise. It is going through a complicated time, which happens to everyone. However, its valuation still reflects a bright future and in line with what it has achieved in the past, which, I think, is totally unlikely. Competition is becoming increasingly cutthroat, and there is the risk that growth in China will suffer.

Total revenues are declining and operating income is even worse due to continued price cuts, which is why I don’t think Tesla, Inc. deserves a P/E ratio 3 or 4 times higher than its auto company competitors. The alternative segments still have marginal weight and cannot compensate for the decline in the main segment. Finally, demand may slow down due to tighter-than-expected monetary policy. Interest rates likely will remain high for longer, and this would discourage financing.

As well as all my previous articles on Tesla, my rating remains Strong Sell since I believe the fair value is still much lower than its current valuation.

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