Tesla earning on October 18, 2023 was a disaster that everyone can agree on. Indeed, it sent shockwaves through the community in the last 24 hours. But as investors scramble to make sense of the numbers and figure out what the future holds for the innovative company, it's important to delve deeper into the intricacies of the situation. In this article, we'll take a closer look at the factors impacting Tesla's financial outlook for the next 12 months, from its burgeoning businesses under the radar to the challenges it faces in an ever-evolving global market.
Unearthing Hidden Gems: Tesla's Under-the-Radar Success Stories
Picture: Gems. Source: Wix
As we reflect on the recent earnings call, it's crucial to acknowledge that not everything is doom and gloom for Tesla. Earlier this year, in my previous article, I was right on with my bearish and neutral cases for the company. What's often overlooked is the remarkable success of Tesla's peripheral ventures. The solar business, for instance, has seen impressive growth, boasting to a 24% margin, which is triple what it was a year ago. Moreover, Tesla's charging license agreements are gaining momentum, with prominent competitors like BMW, Hyundai, Toyota, and more eagerly participating to avoid the massive expenses associated with setting up their charging infrastructure. There are also some promising light on Tesla own Dojo AI platform, which can also be licensed to others for their own self-driving technology training.
However, since these business are still relatively young and contribution to Tesla total balance sheet remain small to the auto one, it is overlooked with Elon extreme cautious in the earning call. In fact, I am suspecting Elon are facing my personal problems and his mental health are not in well for the last 6 months purely from observing his public move and reading the biography about him. Thus, the hidden gems are unlikely to be uncover in the next 12 months. My most optimistic view is that by early 2025, most investors would soon realize it.
The Unforeseen Impact of High EV Interest Rates
Despite these promising ventures, the elephant in the room remains the effect of high-interest rates on the growth of electric vehicles. Understandably, with the auto loan market navigating turbulent waters for over a year, consumers are increasingly cautious about making significant purchases, such as cars or solar panels. Even in my bearish case, I only anticipated that Tesla's gross margin would remain at 20%. However, after the recent earnings call, there's a possibility that the gross margin may dip to 10-12% over the next 12 months.
Picture: Tesla Gross Margin Under Fire For The Next 12 Months. Source: Wix
Elon Musk's Quest for Competitive Edge
One of the reasons contributing to this potential downturn is Elon Musk's unwavering desire to compete with low-margin brands in China, like BYD. These companies benefit from lower costs due to their homeground competitive advantage. While this ambition could lead to long-term success, it's currently putting pressure on Tesla's profit margins.
In fact, it is not wise in my opinion to compete for low price in China. Starbucks strategy is a prime example. Their price for a cup of coffee are relatively the same in America and in Vietnam, which hold different status in each countries. In Vietnam and maybe China, Starbucks are considered to be on a high-end type of brand, which means competing in price in these countries would not only hurt their margins but also their brand image.
Picture: Tesla Going Wrong Way in China. Source: Unsplash
Technical Hurdles in Ramping Up Cyber Truck Manufacturing
Another significant challenge on the horizon is the manufacturing of the eagerly anticipated Cybertruck. As we've seen with Tesla in the past, as well as other major automakers like GM and Ford this year, EV manufacturing is far from straightforward. Given the advanced design of the Cybertruck, it's plausible that it may take 12-18 months to overcome technical issues and become net positive on cash flow.
On a positive note, it is confirmed in the earning call that the Cybertruck is the most advanced manufacturing process of Tesla to date. This means less parts and faster manufacturing time compares to competitors after the next 18-24 months would bring immense competitive advantage to the company going into the future.
Updating Tesla's Stock Price Forecast
Picture: Elon Musk. Source: Unsplash.
Warning: this is not financial advise, I am simply providing my own opinion and laying out my plan for my current Tesla stocks. Please note that my ideal price for Tesla stock is only applicable until further information given in the next couple earning reports.
With the latest developments and a clearer economic picture in mind, it's time to update the forecasts for Tesla's stock price. As I mentioned in my analysis for Palantir, owning both Palantir and Tesla stocks mean we have to accept the unsuitability of its CEOs for both the good and the bad they brings. Of course, the positive overwhelms the negative effects, but it means their moods on any given days could contribute a lot to the volatile in stock price. At the time of writing, Tesla is trading at 57 FWD PE with 31% growth estimated by Wall Street analysts. PLEASE NOTED THAT, in my opinion, great companies in extremely strong positions likes Amazon, Apple, Costco, or Microsoft DESERVES HIGH PEG ratio (above 2-2.5). For me, it is treated as premium for a stable business model.
Assumption for my forecast here is that the next 6 months proves what Elon worried about Cybertruck and EV demand to be true. Before getting into the weed, I do acknowledge that my growth forecast can be seen as lower than the Street average. This is mainly due to the fact that Fed monetary policies can take up to 36 months to see full effect. Hence, with only 12 months have gone since the aggressive rate hike, I would love to be cautious and wrong then to be optimistic only to get burnt. Here are the scenarios to consider:
a) Bear Case:
Picture: Bears. Source: Wix
In the bearish scenario, the Cybertruck's production hurdles and a potential slowdown in the Chinese economy could lead to a 10% gross margin. This, combined with geopolitical tensions effecting US economy and potential cuts in EV subsidies due to inefficient incentives (IMF discussion earlier this month), might result in anemic revenue and earnings growth of around 20% for the next three years (until 2026), ASSUMING the unlikely scenario (<10%) that Cybertruck would not boost total revenue and earning by much. This would result in a current high 3.3 PEG ratio, making Tesla overvalued and potentially leading to a 30-40% decline in the next 12 months, with the stock potentially reaching as low as $125-$146, while the fair value at the range of 150-170 USD (2.3 PEG).
b) Neutral Case:
In the neutral case, the Federal Reserve potentially cutting rates in the 2nd half of 2024, even with the continued price wars in China, could help boost Tesla's volumes and earnings. This, along with potential price cuts from competitors, is a terrible news for the UAW strike since their 30-40% demand of wage increase already making Ford and GM net margin close to 2%. Any further new vehicle price cut will make both legacy automakers going under, especially when they are still loosing tons of money for EV manufacturing. Hence, those legacy automakers will be forced to reduce their EV advancement.
In that case, government subsidies for EV might increase, and gross margin can stay float around 12-14% in the next 12 months for Tesla. A 28% growth in revenue and earnings for the next 3 years, which is slightly higher than analysts' numbers thanks to a slight boost from Cybertruck (~35% based on the current sentiment around the product and Elon's unstable public image), would be feasible in this scenario. This means a current 2.04 PEG and a potential 20% decline in the next 12 months (186-206 USD/share based on the time of this writing) if sentiment around the company to worsen, with my current 12-months fair price for Tesla estimates of $240 (2.3 PEG) if Elon is right. Otherwise, if he manages to pull a rabbit out of his hat, reverse the price war, the Fed pausing rate or any other unexpected positive circumstances to happen, a 2.5 PEG at this point in time should be more ideal for Tesla stock, translating to 256.67 USD per share until the next earning report.
c) Bullish Case:
Picture: A Bull. Source: Wix
The bullish scenario is contingent on significant breakthroughs in Tesla's technology, such as the success of Tesla Dojo and Full Self-Driving (FSD) capabilities, leading to auto taxi services operating within the bounds of existing regulations. Furthermore, even with the increase competition, if Cybertruck proves to be a big success and a potential $25,000-28,000 EV line to be introduce in 2025 (~55%), they will bring a huge boost to Tesla growth. If these advancements materialize by 2025, a 32% growth story is possible, given that Elon public statements do not impact heavily the Tesla brand. In this scenario, Tesla is trading at a PEG ratio of 1.78, resulting in a worst downside of only around 15% in the next 12 months, with the stock reaching as low as $177. At the same time, the fair price for Tesla stock right now until the next couple earning reports is in the range of 260-280 USD per share at 2.3 PEG.
At this point, you might have notice. Yes, in all of my scenarios, Tesla will 100% go under 200 dollar per share at least once in the next 12 months. However, in contrast to many Tesla bear big name investors coming out on all type of media recently, this is due to industry's difficulty in high interest rate economy, not directly related to Tesla own fundamental story. Thus, I continue to keep all of my shares facing these scenario, which partly thanks to my strong believe in my analysis earlier this year leading to purchase majority of my stocks way below 200.
Furthermore, given Tesla brands, pricing power and its position in the EV ecosystem (EV, solar panels, charging stations, FSD, Dojo, future autopilot), I am upgrading from the 1.7 PEG ratio for fair value compared to my last article. Now, it is worthy of a semi-monopoly PEG ratio of 2.3-2.5 for me. Again, as mentioned above, this is a fair range when comparing to other magnificent giants current PEG ratio likes Apple (3.1), Amazon (2.6) or Microsoft (2.35). Therefore, for me, if Tesla actually drops below 160-170, I would love to be a knife catcher for this stock.
Conclusion
In conclusion, the next 12 months are fraught with difficulty and volatile for Tesla. The company's stock price will likely oscillate between these scenarios, largely influenced by factors like the Cybertruck's progress, geopolitical events, and global economic dynamics.
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