Tesla Stock: Shares Divorced From Fundamentals (NASDAQ:TSLA)

The sell-off after the Tesla, Inc. (NASDAQ:TSLA) Q2 2024 earnings was not surprising given the miss in earnings that was published.

Considering the more than 80% share price rally since 1Q24 when consensus expectations for 2Q24 were actually revised down, Tesla shares have been divorced from fundamentals recently.

I have written about Tesla on Seeking Alpha, which can be found here.

Currently, I am neutral on Tesla stock.

I would need to see consensus expectations come down sufficiently after the 2Q24 results and the stock to pullback meaningfully before I think the setup improves and could recommend buying the stock again.

Tesla shares still divorced from fundamentals

Tesla reported a softer than expected 2Q24 operating profit.

The company generated 2Q24 EBIT of $1,605 million, which was -12% below consensus expectations of $1,815 million.

This was due to lower selling prices for Tesla’s S3XY models and financing options, lower S3XY model vehicle deliveries, restructuring chargers and higher operating expenses from AI projects.

This was the 6th quarter in a row of year-on-year declines in operating profit.

Q2 was also the 8th quarter in a row in which operating profit missed consensus expectations for the quarter.

What is more worrying here is the share price movement since the 1Q24 earnings on April 23.

On April 23, when Tesla traded at $144.68, the consensus expectation for 2Q24 EBIT was $1,948 million.

Recently, before the 2Q24 earnings, the consensus expectation for 2Q24 EBIT was revised down to $1,815 million.

During the same time, share price has increased by +50% (after the post-earnings sell-off) and in fact, at the peak, share price was up +82%.

Moreover, the actual 2Q24 EBIT of $1,605 million is -79% below the $7,651 million level that 2Q24 consensus peaked at on October 20, 2022, when TSLA shares traded at $207.28.

This illustrates how divorced from fundamentals Tesla shares have been recently.

Benefit from regulatory credit sales skewed margins to the upside

If not for the much higher than expected regulatory credit sales, Tesla’s 2Q24 operating profit miss would actually have been materially worse.

Regulatory credits came in at $890 million in 2Q24, much higher than consensus expectations of $409 million.

These sales of regulatory credits are 100% margin items, which means they flowed straight down to benefit operating profit for 2Q24.

While they may bring real benefits to Tesla, these tend to be lumpy in general and not thought to contribute to profits in the long-run as the industry overall increasingly transitions toward electric vehicles.

If the consensus expectations had correctly accounted for 2Q24’s higher regulatory credit sales, the 2Q24 EBIT of $1,605 million would have been an even larger -30% miss compared to consensus expectations.

Restructuring costs also skewed margins to the upside

The 2Q24 operating profit miss would have been even larger if we account for the potentially higher than consensus restructuring costs.

While regulatory credit sales benefited headline earnings by $481 million (difference between $890 million and $409 million above), restructuring costs also came in higher than expected.

Management’s earlier guidance for restructuring costs for 2Q24 was more than $350 million, but the actual 2Q24 restructuring costs came in at $622 million.

This means that if consensus embedded the low end of $350 million restructuring costs, there would be a $272 million headwind from the higher restructuring costs (difference between $622 million and $350 million).

2Q24 automotive gross margins and free cash flow came in softer than expected, posing not just a risk to negative earnings revision, but to Tesla’s lofty valuation.

2Q24 automotive adjusted gross margins came in at 14.6%, below consensus expectations of 16.4%.

Tesla generated $1,342 million of free cash flow in 2Q24, missing consensus expectations by a whopping -31%.

This leaves 1H24 free cash flows still negative, at negative $1,189 million, posing a risk for consensus expectations for 3Q24 free cash flows.

While Tesla isn’t just a car company, Tesla’s 2Q24 free cash flow of $1.3 billion is in stark contrast to General Motors (GM) $5.3 billion free cash flows for 2Q24. This is especially when General Motors has an equity valuation of $52 billion and Tesla has an equity valuation of $670 billion.

New models

Tesla’s Cybertruck is now in production with more than 125k capacity.

The Tesla Semi is currently in pilot production.

The next-generation platform is also still in development, and Tesla expects to be on track to deliver this more affordable model in the first half of 2025.

The Roadster is still in development, and Tesla has completed most of the engineering of the model. Tesla expects to be in production with the Roadster in 2025.

FSD

In 2Q24, the focus of Tesla was to reduce interventions with supervised full self-driving, or FSD, driving. One feature that was rolled out is a version of FSD that primarily relies on eye tracking software to monitor driver attentiveness.

In addition, the Tesla autonomy team is improving the robustness of its Supervised FSD model by adding substantially more parameters. As such, Tesla will need to improve on its hardware and software development.

The extension of Gigafactory Texas is almost complete, and it will house Tesla’s largest cluster of H100s.

As can be seen below, while existing AI training capacity for Tesla has stayed constant for some time, it will grow significantly by the end of 2024.

Tesla did not provide details into OEMs licensing of FSD, but management stated in the earnings call that there are a few major OEMs that have expressed interest in licensing FSD.

Tesla did not provide any specifics on FSD take-rates, but there was a positive directional commentary on FSD adoption rates since the FSD subscription price cut.

CEO Elon Musk did say that unsupervised driving could be possible by the end of this year and highly probable for next year, based on his optimistic expectations.

Unfortunately, the bad news for Tesla doesn’t stop, with the Robotaxi event postponed to 10/10 due to the need for some changes to improve the vehicle.

Tesla has to make Dojo work

While Elon Musk mentioned that Dojo was a long shot that was worth taking, it did seem like the odds of Dojo being successful seems low.

In the 2Q24 earnings call, Elon Musk had this to say about Dojo and Nvidia:

Yes, so Dojo, I should preface this by saying I’m incredibly impressed by Nvidia’s execution and the capability of their hardware.

And what we are seeing is that the demand for Nvidia hardware is so high that it’s often difficult to get the GPUs. And there just seems this, I guess I’m quite concerned about actually being able to get state-of-the-art Nvidia GPUs when we want them.

And I think this therefore requires that we put a lot more effort on Dojo in order to ensure that we’ve got the training capability that we need.

So we are going to double down on Dojo, and we do see a path to being competitive with Nvidia with Dojo.

And I think we kind of have no choice because the demand for Nvidia is so high and it’s obviously their obligation essentially to raise the price of GPUs to whatever the market will bear, which is very high.

So, I think we’ve really got to make Dojo work and we will.

Because of the difficulty in obtaining Nvidia hardware, Tesla is now working hard to make sure Dojo works and that it is competitive with Nvidia.

Energy

The energy generation and storage revenue increased 100% from the prior year to $3,014 million, with both the Megapack and Powerwall achieving record deployment in 2Q24, resulting in 9.4 GWh of total storage deployments.

The Energy business continues to do well, with record revenues and gross profit in 2Q24.

Management shared that the Lathrop Megafactory continues to ramp successfully, achieving a production record in 2Q24, and the Shanghai Megafactory remains on track for start of production in 1Q25.

Valuation

The revenue forecasts from 2024 to 2028 are all revised downwards by -6% on average on pricing and deliveries headwinds, with 2024 estimates going down the most at -8%.

The operating profit and EPS lines were all revised downwards from 2024 to 2027 by -14% on average, which is relatively in-line with the miss in 2Q24.

After revising down the revenue, operating profit and EPS lines, my estimates are still not conservative.

My estimates are about 10% to 15% above the sell-side analyst forecasts for Tesla, which likely reflects more optimism around FSD and Optimus in the outer years.

My 1-year and 3-year price targets for Tesla go to $209 and $254 respectively, implying 60x 2025 P/E and 40x 2027 P/E.

Conclusion

After the Q2 2024 earnings release, I think it has confirmed my fears that Tesla, Inc. stock has run up too fast, too quickly without any grounding to fundamentals.

Operating profit was weaker than expected despite consensus expectations coming down, as this is the 8th quarter in a row in which operating profit missed consensus expectations for the quarter.

Regulatory credit sales and restructuring chargers would have made the operating profit miss and earnings miss much larger, as these have in a way skewed the earnings numbers for 2Q24.

Gross margins and free cash flows were soft and in relation to General Motors, Tesla’s valuation at today’s fundamentals do not make sense.

I would need to see consensus expectations come down sufficiently after the 2Q24 results and the stock to pullback meaningfully before I think the setup improves.