Tesla Investors Are Skating On Thin Ice (NASDAQ:TSLA)

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Title: Tesla Investors Are Skating On Thin Ice (NASDAQ:TSLA) Originally reported on seekingalpha.com by James Hanshaw

20000756 – TECH NEWSer | 20000757 – Tesla Electric Cars | •| Tech |•| Newser |•| Technology | 20000757 – Tesla Electric Cars | •| Tesla |•| Electric |•| Cars |

Tesla (NASDAQ:TSLA) has a strong base of retail investors who own around 37% of the stock, according to S&P Global data. Many of those can only be described as Elon Musk worshippers and they account for much of Tesla’s valuation that puts it way above other car makers.

But even Musk cannot walk on water and has demonstrated that by selling more than $15bn of shares this year in an apparent anticipation of the ice melt. So far Tesla’s shares are down around 34% YTD. If he is compelled to go ahead with distracting takeover of Twitter (TWTR) for $44bn, he may have to sell a lot more. And had he had confidence the price would increase this year he would not have sold that large amount so early to prepare for an event that may still be months away.

I cannot walk on water either but I have been proved right since my first article Tesla’s Ticking Time Bomb published on November 16, 2021, that advised investors to stay away

The following chart shows that:

I strongly believe the ice will continue to crack and the price will sink much further, drowning those that stay with it.

That is a strong and very much contrarian statement given Tesla’s incredibly good development under Elon Musk and I shall show some of those points here first, then expand on my outlook for a sinking future later.

Tesla’s outstanding performance

Tesla makes the most popular electric vehicles, EVs, in the world. In the last quarter its sales rose 42% continuing a trend that started in 2019 and taking profits up with those.

Despite that 34% decline YTD the stock price is around 1,200% over the past 5 years. Many Musk worshippers would say that it because it is tech stock but many tech stocks have collapsed some 70 to 80% in the market crash this year. Tesla is a car maker and it has done outstandingly well against other car makers as it has against most tech stocks.

The latest results from Tesla’s website were good, but the Gross Margin is declining.

F I N A N C I A L S U M MA R Y (Unaudited)

($ in millions, except percentages and per share data)	Q2-2021	Q3-2021	Q4-2021	Q1-2022	Q2-2022	YoY
Automotive revenues	10,206	12,057	15,967	16,861	14,602	43%
of which regulatory credits	354	279	314	679	344	-3%
Automotive gross profit	2,899	3,673	4,882	5,539	4,081	41%
Automotive gross margin	28.4%	30.5%	30.6%	32.9%	27.9%	-46 bp
Total revenues	11,958	13,757	17,719	18,756	16,934	42%
Total gross profit	2,884	3,660	4,847	5,460	4,234	47%
Total GAAP gross margin	24.1%	26.6%	27.4%	29.1%	25.0%	89 bp
Operating expenses	1,572	1,656	2,234	1,857	1,770	13%
Income from operations	1,312	2,004	2,613	3,603	2,464	88%
Operating margin	11.0%	14.6%	14.7%	19.2%	14.6%	358 bp

Click to enlarge

If more financial information is required, it can be found here on Tesla’s website.

Sales in the current quarter are likely to be good as well.

Cash and cash equivalents are good but in June this year Elon Musk said that Tesla’s new German and Texas factories were “gigantic money furnaces” losing “billions of dollars”. Billions will also be needed to build the additional giant factories required, as might the many existing problems that remain unresolved with new ones still emerging.

I will now move on to those…

Ice Breakers

Internal ones…

Many are self-inflicted. I mentioned some of those in Tesla Is Past Its Sell By Date. They included problems with the authorities in California, many lawsuits against them and a multitude of recall problems.

More have since been added to those recalls including 1.1 million cars mentioned in this recent SA report.

There are others too…

Bitcoin

Why Musk bought into this is a question I cannot answer as I see no connection with car making. He bought $1.5bn of Bitcoin on Feb 8,2021, at $46,365. The price as I write is $19,334, a plunge of 58%. Some has been sold but Tesla still has around 25% of that original bad buy.

Batteries

Tesla is spending billions building factories to make the batteries for its cars. That seems logical but others are doing so too meaning there will be a glut in the not too distant future. As it is Tesla sits way down in “Others” in the world league of EV battery makers

Solar

Using Tesla money, Musk rescued a loss solar panel builder owned by relatives. That sector has nothing to do with car making, is saturated with low-cost producers and Tesla has no chance – and never had – to become a global player, as it is with cars.

Robots

Tesla has just held its long-awaited AI Day event in Palo Alto, California. A prototype Optimus humanoid robot was shown off. Analysts think that could prove Tesla is a tech player as much as an automaker and think that creating a working prototype will move the company up a few notches if a production date for the first version of Tesla Bot is seen as being closer. Musk said “Our goal is to make a useful humanoid robot as quickly as possible. There’s still a lot of work to be done to refine Optimus and prove it.”

He also wants to make it in huge volumes so that the price can become affordable for many thousands at around $20,000. I suspect most people would rather cut their own lawn and spend that money on something else.

Also, analysts might think that but robots are not what investors in a car maker want plus there are many well established robot makers already around the world; Swiss giant ABB (ABB), Chinese owned German company Kuka, US conglomerate GE (GE) and many more. Near Tesla’s Palo Alto office, Agility Robotics are pioneers in humanoid robot developments.

Tesla cars are built by robots and more complex ones are used for delicate surgical operations on the human body. Along the road from Palo Alto, in Sunnyvale, CA, Intuitive Surgical (ISRG) has long been the world leader in making those surgical robots.

Since Tesla is also aiming for self-driving cars, they will not be needed for that purpose either.

To make robots in the huge quantities Tesla envisages requires years in time and giga bucks being spent on building the factories!

One would have to be an Optimist to see how Optimus will make profits for Tesla shareholders in any foreseeable timeframe and perhaps ever.

I might take a more positive view if Musk soon announces an OptiMrs that would look like my lovely wife but not have her Command and Control capabilities!

Talking of those, Musk broke through such capabilities – that German bureaucracies thought they had – in order to get the money burning factory there built. In many ways one could admire that but now those offended are getting their own back. Bloomberg recently reported that Elon Musk May Regret Putting Tesla’s First European Plant in Germany.

All those internally created problems are cash burners with Bitcoin, making solar panels and robots having nothing to do with growing Tesla as a world leading car maker. Those and Twitter plus Musk’s other activities such as SpecEx are distractions from the job of growing Tesla.

In the above are several key words starting with the letter C, as does Contrarian. There are more C words to come in the…

External Ice Breakers

Competition has become huge and is growing fast. All major car makers have been pouring billions of dollars into developing their own EVs and converting existing factories/building new ones in which to make those. Some are also building factories to make their own batteries.

Competition from China is coming fast. China has for some time been the world’s largest car market and is now also the largest for electric cars. Of those the largest is Chinese car BYD Company Limited (OTCPK:BYDDF, OTCPK:BYDDY) that started as a battery maker. BYD stands for Build Your Dreams (??? b?yàdí) and was founded by a guy – Wang Chuanfu – from a poor family background who became a professor at a research institute for non-ferrous metals in Beijing.

Today, he is among the world’s richest men, because while in Beijing he had the vision that China’s startup battery producers could compete with Japan. In the mid-1990s, Wang relocated to Shenzhen just as it was transforming from a sleepy fishing village into a global manufacturing hub. The mass migration from rural areas gave the city’s factories the cheap labor they needed to compete with rivals in Japan, Korea, and Taiwan. In the next 20 years, BYD in some ways followed the proven path among leading East Asian corporations of examining Japanese and U.S. products and finding ways to duplicate the basic technologies without actually making direct copies of them.

Today, BYD has overtaken South Korea’s LG as the world’s second-biggest producer of EV batteries, behind China’s Contemporary Amperex Technology, known as CATL.

Along the way, its EV unit was born in 2002 from an acquisition of Tsinchuan Automobile, then the sixth-largest car manufacturer in China by sales volume. Wang took out the petrol engines from existing models and put in electric motors. In some ways he was ahead of Tesla and now is way ahead because Wang set about a process of mastering technologies from their finished batteries all the way to the lithium and nickel mines.

BYD is the largest EV maker in China and is now taking the first steps to export. Its prices are way lower than Tesla’s and its cars look ok too…

According to a recent SA report Toyota (TM) – the world’s largest car maker is going to make a low cost EV for the Chinese market in a jv with BYD.

There are around 300 EV makers in China. The Chinese government wants to whittle those down to around 30 by mergers in order to make them big and able to enter world markets too. Tesla is number three in China.

Leapmotor is one of those unknowns in the west that may one day be well known; Zhejiang Leapmotor Technology is seeking to raise as much as $1bn in what would be Hong Kong’s largest initial public offering this year, in the latest test of investor appetite for China’s fast-growing EV market. Leapmotor plans to raise as much as HK$8.1bn (US$1bn) from the sale of about 131mn shares in Hong Kong in a range of HK$48-HK$62 each.

A report from Merics says “Europe is now the main target for electric vehicle exports from China.“

New EV names are heading for US highways as are old established names. Many of those are detailed with photos in this Car and Driver report

Many of those are targeting Tesla! Volkswagen (OTCPK:VLKAF) has said it aims to pass Tesla in EV sales by 2025. GM has said similar things. All are targeting a market that is not growing as fast as Tesla’s production ambitions. As a visionary, Musk has achieved near miracles to get Tesla where it is today. However, it will need another miracle in the near future if his target of 20 million cars are to be made, and even aiming for them could put Tesla into reverse gear financially. At Tesla’s last Cyber Round Up in Austin, Texas, Musk said the company would “end up building at least 10 or 12 Gigafactories.” Those Gigafactories cost Gigabucks to build. They also require years to build, and he needs them soon if he is to make 20 million cars per year by 2030. That means completion before the end of 2029 – just over 7 years away. None have been started, nor even have locations been announced!

In the unlikely event Tesla achieved that number, it would require another miracle to sell that many cars, because gaining 16.4% of the entire world car market – including ICEs – is probably impossible for any car maker. GlobeNewswire made the 2030 estimate of total car market size in 2030 of 122.83 million units that I used to calculate that market share percentage. It makes worthwhile reading.

It also looks rather stupid if S&P Global’s estimate of 26.8 million EV sales by 2030 proves correct. That would mean Tesla has to achieve 75% EV market share! It may have had that until now but there is no way it will by 2030.

Hydrogen fuelled cars are all also hitting some roads in growing numbers. Toyota who led the world into hybrids are leading with that. Toyota’s Mirai – pictured below – looks good and is priced from $49,500.

Their fuel cells Elon Musk dismissed as fool cells. Those “fool” cells use much less lithium than batteries and growth in EV sales means lithium is becoming scarcer and more expensive so they may yet make Musk look like a fool.

Politics and Economics

China heads the list for both. Economically it is growing still but the bigger threat for Tesla is political.

Among the latest flash points, Speaker Nancy Pelosi’s visit to Taiwan, a de-facto independent nation that China considers its territory, only stands to inflame tensions on the topic already stoked by President Biden’s consistent undermining of US strategic ambiguity. Military drills conducted around the island following the visit have only raised alarms among Taiwanese military officials. In recent days, President Biden discarded ambiguity completely by saying the US will indeed defend Taiwan.

China is no innocent and such tensions could accidentally trigger a new world war. Hopefully, that will not happen but Tesla’s huge investment in China is a sitting target in a trade war with the US.

Elon Musk’s SpaceX company may also compound Tesla’s potential problems in China. The South China Morning Post published this article, titled “China military must be able to destroy Elon Musk’s Starlink satellites if they threaten national security.”

There are also many reports that the Chinese government sees Tesla’s cars as a spying threat, having banned them in places requiring tight security and stopped government departments from buying them for official use. This getjerry report tells some of that story.

Given the influence the government has over its people, it could easily encourage them to buy Chinese brands in preference to Tesla.

Emerging markets. The ice has already cracked for some of those such as Sri Lanka and they are now submerging markets. They will not be car buying markets.

Europe. The fundamentals are not good for any car maker at present.

Britain is again the sick man of Europe – an accolade it enjoyed in the 1970s- and now renamed Stagnation Nation. Today it has C words in abundance; a housing crisis, a healthcare crisis, an energy crisis, a cost of living crisis and now a currency crisis too, the latter caused by a civil war. It is no surprise that the Bank of England projects British households are facing the biggest collapse in living standards since such records were first kept 60 years ago. The chief economist at that monetary policy custodian – the BoE – said the UK government’s recent mini-budget loosening of fiscal policy “will require a significant monetary response”. That response means raising interest rates thus making things worse and that civil war has driven British pound down to record lows in a country already in recession and heavily dependent on imports of many things. That means Tesla’s cars – all of which are imported – have become more expensive unless Tesla absorbs the difference.

Those warring policy makers there have had the BoE buying bonds while the Treasury needs to sell them to fund tax cuts! They have become the real life manifestation of the mythical Doctor Dolittle Pushmi-Pullyu creature which has two heads at opposite ends of the body pulling in opposite directions.

Click to enlarge

That creature was a Do Little but its re-creators in Britain are doing a huge amount of economic damage!

I may have used a lot of words on Britain – a country that may not be of importance to most investors and nor to me – but until fairly recently it was the 4th largest car market in the world and remains a large one …for now.

Germany is also a recession or nearly so. It is Europe’s largest economy and the world’s 4th largest.

Cars are a consumer discretionary and sales crash in recessions taking Tesla’s (and others) stock price down with it.

The US is in ok shape for now with employment in relatively good shape but a less obvious civil war is taking place there too with tight fiscal/loose monetary combination pulling in opposite directions. Maybe contagion from Britain’s illness is happening in the US.

President Biden’s new Inflation Reduction Act introduced a spending boost of $467bn that a much more hawkish Fed is trying to counter with higher interest rates to stop spending. That has already pushed 30 year mortgage rates over 7%. Buying a house and other essentials is more important than buying a new car.

The concern about people not buying cars with those that do having more and more EV brands to choose from means many investors have already headed back onto firm ground.

Tesla’s stock price is below the 200 day moving average…

But not all are heading for safety given the

Investment Ratings…

The Financial Times shows 37 analysts offering 12 month price targets for Tesla Inc have a median target of 333.33, with a high estimate of 461.00 and a low estimate of 24.33. The median estimate represents a 25.66% increase from the last price of 265.25.

High	60.2%	461.00
Med	15.8%	333.33
Low	-91.5%	24.33

Click to enlarge

The vast majority of those analysts say the price will increase leaving very few in the contrarian camp – that includes myself.

That differing conclusion is made more stark by the fact those analysts also know – or should know – that much of the world is in or near recession when car sales crumble plus the other danger factors I mention.

SA ratings summary…

SA Authors Hold 3.10

Wall Street Buy 3.86

Quant Hold 3.47

Insider sentiment may summarise it all: Elon Musk and other insiders have long been sellers. The last time one of them bought was in 2019. Musk sold even more just a few weeks ago, in August!

Joining all those dots leads me also to only one conclusion…

Tesla Investors Are Skating On Thin Ice

Musk selling is tantamount to pulling the rug out from underneath investors.

He and the company face many challenges including potentially very damaging legal ones.

In my opinion his diversification into unrelated areas of business is both a distraction and a misuse of Tesla shareholders money.

Tesla’s price has long been at a PE multiple far higher than any other car maker during a time it was virtually alone and far ahead of all in making EVs. Today the EV market will soon be crowded in a worsening economic and political climate.

Musk’s diversification into unrelated and overcrowded areas has been the downfall of all conglomerates in the past and may be is proving Peter’s Principle right!

Tesla faces a mountain of challenges many of which have built up over a long time and remain unresolved with more added in recent times plus recessions now adding to those.

Despite all that the majority of analysts – most of whom work for large, respected organisations – only see upside from here.

Earlier this year my target was $100. That was before the split, meaning around $34 now.

My conclusion is therefore starkly opposite those optimistic analysts. I see that above low forecast of $24.33 within the next 12 months as being closer to the mark than any of the others.

Contrarian view that maybe but I am staying well away from Tesla and recommend that others get off that thin ice soon…before it finally cracks under them!

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