Tesla Stock: Today’s Dire Reality Or Believe The Hype? (NASDAQ:TSLA)

Investment Thesis

I’ve been studying Tesla (NASDAQ:TSLA) (NEOE:TSLA:CA) since it hit the lows of $120s back in January 2023, and the entire time I’ve been extremely undecided about whether the potential reward was worth the heavy risk involved in the investment. To the Tesla bulls out there, believing in the vision of Optimus, FSD, and the energy sector of Tesla comes very easily. However, my investment style requires lots of due diligence, supporting data to come to a decision.

I currently hold Tesla at a “Hold” rating but encourage a lot of precaution because the current stock price does not justify at all where the company currently sits. The reason the company is priced where it is today because of the potential dominance of FSD and Optimus which Elon has managed to sell to people, despite any real data backing up his claims.

However, the market is forward-looking and if we had the luxury of waiting to see what pans out with Tesla’s robotaxi business, or Optimus production, before investing in the company, then we’d all do extremely well.

Earnings / Today’s Reality

Below, I share with you a snapshot of Tesla’s Q2 earnings. Focus on the column on the right, which shows YoY % changes. It’s pretty dismal, and looking at this alone makes it extremely difficult to justify today’s current valuation of 43.3x 2024E EV/EBITDA.

Here’s a summary of the earnings:

• Revenue has grown at 2% YoY, which is below the rate of inflation.
• Revenue is growing considerably slower than the cost of goods sold.
• Operating expenses up 39% and operating margin down 333bps.
• Non-GAAP net income down 42%.
• Non-GAAP EPS down 43%.

Does this look like a company that should have a FWD P/E of 100x? Most definitely not.

A Non-Biased Opinion On The Tesla Future

However, investors are willing to pay a FWD PE of 90x because they believe the narrative of Elon and the picture he paints about just how big FSD, Robotaxis, and Optimus will be over the next 4-5 years. Let me break each one down and discuss today’s reality vs the likelihood of the huge opportunity actually happening.

Optimus Valued “Several Times” $5 Trillion

I quote Elon Musk here below from Q2 Earnings call on July 23rd:

Talking about FSD…

ARK Invest thinks, on the order of $5 trillion. I think they are probably not wrong. And long-term Optimus, I think, it achieves a valuation several times that number

Optimus is basically a humanoid robot that Tesla are building, initially focused purely on helping to perform tasks in the Tesla factory to automate a lot more processes. The longer-term goal of the Optimus robot is to sell to outside customers.

I love this product, and watching videos on YouTube of Optimus performing pretty complex tasks is completely mind-boggling. However, I have 3 issues with it:

1. Maybe I’m less visionary than I should be, but I just can’t see a world anytime soon where robots replace humans at work. Maybe this way of life does come at some point, but it’s going to have to be a very slow, and gradual transition.

2. There is zero data supporting anything aside from pure hype that Elon has created (which admittedly he is extremely good at). All we know about Optimus is that production is planned to ramp up in 2026 by which Tesla plans to sell to outside customers. There is no data on costs involved, prices charged, or any form of profitability, or potential customers.

3. There’s clearly solid competition from:

• Apptronik
• Agility Robotics
• Figure Robots
• Boston Dynamics
• 1x Tech
• The Sanctuary AI
• Unitree Robotics

Tesla aren’t miles ahead or miles behind of these competitors at the moment and therefore the competition is real. On a more bullish note, I do not see the competition being too debilitating to Tesla over the long term. The reason I say this is because of Tesla’s ability to leverage their manufacturing mastery, AI expertise, and capital raising skills. However, back to reality. The Robotics segment is a highly competitive space, especially for a company like Tesla, who are not solely focused on Optimus.

Therefore, for me, currently Optimus should not be considered to add much to the Tesla valuation today just because it’s all very up in the air.

The Other Side Of The Argument

As I said, I’m aiming to be unbiased in this article and I am willing to highlight the other side of the argument where Optimus could add +$20 trillion to Tesla over the next decade or so.

The reality is likely that +$10 trillion is too much, and my opinion is too little. But let’s paint the other side of the picture.

The future of labour is changing rapidly. Here are some well-supported projections by respected researchers:

• Deloitte predicts 2.1 million unfilled jobs by 2030 in warehouses.
• The ILO estimates 60 million agricultural jobs are needed.
• Korn Ferry predicts an international shortfall of 85 million skilled workers across many industries.

Current projections state that each robot will have a cost of $30k, and likely will generate $94k in recurring revenue (robots will be leased and not sold). At a projection of 1.5 million robots by 2030, this could translate in +$140 billion in revenue.

If you see the labour market changing (and Optimus being one of the main beneficiaries of this change) then Tesla is one of the most obvious buys in the market.

If, like me, you currently see this as more “hype” rather, then I’d avoid TSLA for now. What I do suggest though is that you keep an open mind. In the markets, things change very quickly and one bit of data from Optimus could essentially change the future of Tesla very quickly to the upside or downside.

FSD & Robotaxis

I feel like there’s been a lot of hype around FSD over the last 3 months since ARK Invest gave a $2,600 price target for Tesla and said that FSD would account for 90% of the value of the company. FSD is something I’m a lot more bullish on (compared to Optimus anyway) because there has been proper data and upgrades to support the autonomy.

I have no doubt that FSD (and robotaxis) will be a big part of Tesla in the future, but the unknown for me is as follows:

1. The timeline could be 15+ years down the road because of development of an FSD vehicle and also legislation is currently way behind. Even worse, the US is perhaps the most advanced globally in FSD legislation, which makes the international opportunity seem that much further away. It was only on March 7th 2024 that UNECE DCAS regulation was adopted to allow Beta testing for FSD vehicles to happen in Europe. Beta testing for FSD in America has been around since November 2022, so we have about a 1.5 year delay between legislation currently.

2. I believe the competition is being underappreciated, particularly from Waymo, which just received a $5 billion investment from Alphabet (GOOG). There’s also competition from Uber (UBER) who are prepping themselves for the autonomous future.

Therefore, I think it’s irresponsible of ARK to suggest that by 2029 the Robotaxi business (currently valued at $0) will be a multi-trillion dollar business. Today’s reality is that we have no management projections regarding FSD take rates, or anything alike. I sense we will begin to gradually know a lot more information over the coming months before the Robotaxi event on 10/10/24. Until then, it’s a continued waiting game.

China’s EV Makers

The final point I want to make is that Tesla’s core business (electric vehicles), which makes up 80% of profit today, is under tons of pressure. Chinese EV makers are pouring cash into R&D. For example, NIO (NIO) is currently allocating 29% of revenue to R&D compared to Tesla’s 5.4%.

And the Chinese market is loving the EVs, with 40% of all new car sales being EVs. That’s creating a load of real-world data and feedback loops that Tesla is currently not benefiting from.

The other danger is that China is adding cash subsidies of up to $2,770 for consumers who convert to EVs. The environment there is way more beneficial and makes it extremely hard for Tesla to compete.

There’s no denying that Tesla was the first mover, but the Chinese EV makers are now competing to completely disrupt the one core business that Tesla currently has.

Conclusion

I realize this article definitely sounds on the more bearish side, but I think it’s very important to be realistic with where Tesla currently is whilst also trying to paint a realistic picture of the future.

Despite the realism that I’ve tried to portray in this article, there are of course reasons to be bullish, hence why the market is pricing Tesla at 100x PE. Firstly, the Robotaxi event has been scheduled for 10/10/24 which should provide investors with some data on FSD users, take rates, and revenue projections so that it stops just being a big guessing game.

Secondly, Tesla’s energy business is soaring, with Q2 gross profits up 200% vs Q2 2023. I didn’t discuss energy at all in this article, but it’s quite difficult to be bearish on Tesla’s energy business post the stellar results shown in Q2.

Overall, I do see Tesla as a very solid risk to reward investment, however, I think bullish investors out there need to appreciate the risk of the unknown a bit more than they currently are. Do I believe everything Elon Musk is saying about Optimus and FSD? I don’t think so.

But I do believe FSD will at some point be huge, and I also appreciate that I may be wrong with my predictions on Optimus. For now, I think it’s important to sit on the sidelines with Tesla and just wait to see how everything settles before jumping onto the Optimus, FSD, Elon Musk hype train that is currently supported by very limited data.