Alright, as you probably noticed Tesla is dropping again. We saw it touch about 220
one day mid Feb, but is since down over 20% from that, now at around 170. Still no where
near the bottom we saw earlier this year at around 100. But still moving away from more
of a comfort zone for many investors, especially those who are holding from buying at around
$300. And I understand how many of you are down millions of dollars since then, and it's
not easy, and this recovery, or recent bull run, has made it somewhat easier.
Now this recent drop is again due to many factors. We had the sell off after investor
day with investors not happy no new model was announced, we have some issues with a
few cars, we have more price drops, we have Elon getting political again, but mainly the
market is at the mercy of the FED still. Inflation is not going away. They have done what they
can to reduce it, the low hanging fruit where possible, like the transitory side of it,
but we are still facing true monetary inflation. Once money is printed, its very difficult
to unprint it. And the number tool we have with monetary policy to combat inflation is
indeed interest rates. So now the market is concerned that rates will actually rise and
higher than we expected.
In January the market was very brave, and calling Jerome Powell's bluff, and we saw
a massive bull run. The market was forward looking, and even managed to see rate reductions
as early as the end of this year as a possibility. So you just need to hold until then, and then
the market will recover to possibly all time highs. Inflation looked as if it was on its
way down, and the interest rates were actually having an impact.
But now the numbers are not looking like that may be the case so much. Of course if Jerome
Powell does raise rates as much as 50 basis points, he will look like even more of a moron
than he does already and lose even more credibility. They are trying to crush inflation, without
crashing the economy or markets, and aiming for this so called soft landing, which looks
very hard to pull off. Sometimes the market believes its possible, other times it doesn't,
sentiment is incredibly fickle right now. And as a result the VIX is up 17% today, to
about its high for the year.
So what does all this mean specifically for Tesla. Although Tesla is not a car company
per se, the vast majority of its profits do come from cars. As interest rates rise, then
capital expenditures that are purchased with debt fall. This would include cars and real
estate. So the aggregate demand for autos will drop. This would include Teslas.
Tesla's reaction to this may be to drop prices further. Of course they could always advertise,
which seems to be an unpopular opinion, but there are still a lot of consumers out there
that don't understand the benefits of electric cars, or Tesla specifically. But it seems
that Tesla prefer to drop prices instead. Tesla are however reducing their costs simultaneously,
and there has been some deflation for Tesla too, along with more automation and less labor
required to assemble vehicles.
People say that Tesla have started a price war, but we are not seeing legacy really engaging
in price drops, aside from a small drop with Ford's Mach E. So every time Tesla drop their
prices, if its due to aggregate demand, they are increasing market share, even if Tesla
are not increasing supply. However, Tesla are also increasing supply at the same time.
It's more than likely Q1 will see record production and deliveries again. Which means the aggregate
demand of cars drops, but the supply of Teslas increases which means Tesla's market share
increases in two ways. We also hear that Tesla has the best customer retention over all other
auto brands, so once Tesla get a customer, then they retain that customer better than
other manufacturers. After owning a Tesla, I really don't know how I would go back to
something else, just based on the sheer driving experience, let alone the technology and safety
on top of that.
So if rates continue to rise, and perhaps the economy actually does start to slow down
more, then the auto industry will get hit, but as far as Tesla is concerned, this will
mean a reduction in gross profit, rather than a reduction in actual unit sales.
But within time there will be a return to normality, where rates will drop, and the
economy will recover, even if its not for another 2 or 3 years. We know how popular
Teslas are in those economic times, and that Tesla may return to more like a 25% gross
margin. Yes, possibly 30% if 4680 cells ramp, and the costs get to as low as Elon tells
us, and the new car is highly profitable, and if tax credits and subsidies remain, etc
However there is nothing wrong with 25%. And as I have been talking about at length for
years, is gross margin isn't the important factor, its all about operating margin, and
Tesla have outstanding operating leverage. As Tesla continue to grow and sell more vehicles,
the discrepancy between operating margin and gross margin reduces. For example we have
been at around 15% operating margin recently, yet up around 30% gross margin. But only around
just over a million vehicles a year. As this approaches 3 million or more, then even if
we are at 25% gross margin, operating margin will start to come up to closer to 20%. That
is a big difference. What I am saying is that even thought Tesla may have reduced prices,
the actual operating margin is not affected. Of course that operating margin would be at
a slightly lower ASP, but there's still good profit.
One other aspect to this operating margin we have had in the past, is that is had been
brought down by the energy business. The energy business has been basically running at break
even for the last few years, or even at a loss. This means that operating margin drops.
But now we are finally seeing energy with higher margins, and actually making some decent
profits, this will also help bring up the operating margin. Especially if we are going
to see energy at 30 to 40% gross margin. Not only that Tesla has subsidies from the US
government, which are just going to come in as pure profit, that also increase operating
margin too.
Anyway, when we bring all of this back in, and start to estimate what a forward p/e for
Tesla may look like, now the stock price is lower, it is starting to look like good value
short term. If it continues on this decline, and drops to perhaps 140 again, which I don't
think will be likely, but it could be possible if we see panic in the market. Then at around
that price, I would actually call Tesla close to a value stock.
If we look at coca cola right now, it has a p/e ratio of 27, do you think Coke has much
potential for growth compared to Tesla. Sure Tesla has a p/e of 47 right now, but I focus
more on a forward p/e for Tesla, a realistic one that we can calculate with our projections,
as we likely know Tesla better. And if Tesla are able to generate $15 billion in earnings
this year, then that is also a forward p/e ratio of 27.
Now those earnings are based roughly on Tesla's current prices, and around 1.8 million deliveries
for the year. If they have to reduce prices somewhat, then earnings will be less. But
my point is, those price reductions are due to the interest rates which are likely temporary.
So at the end of the year, if the stock price or vehicle prices didn't change, Tesla would
be trading at a p/e of 27. Which appears to be a p/e ratio of some value stocks, that
show very little sign of growth.
Even this year alone though, Tesla has many reasons to boost that p/e ratio, if they can
show to the market they can successfully make a Cybertruck, that will boost the stock. If
they can show they really can ramp up 4680 cells, that will boost the stock. If they
show they have so much belief in future vehicles and demand that they start building a new
factory, and build it fast, that will boost the stock. If they show they believe they
can make the semi truck with 4680s and start extending Nevada, then that will also boost
the stock. Yet we are floating around a p/e ratio of 27 perhaps at the end of this year,
at their current trajectory.
Sure, the stock market is potentially walking on egg shells right now, and concerned about
a real market crash, and going into a real recession, which is a obviously a possibility
still. And this may be something investors have to go through, and the auto industry
is affected as it is cyclical. But due to Tesla's lack of debt, pricing power, and energy
income, it will simply be that much harder for the competition. Tesla's costs will reduce
during such a time, and they can reduce prices and maintain profits. And hopefully the Cybertruck
as so much demand that a recession won't affect that. And possibly as early as next year there
may be another vehicle that is recession resistant too.
And eventually the market will come out of any such rut, and people will start buying
cars again.
So yea, Tesla is looking like its a good price right now, but if it gets much lower, it is
going to start looking like an actual value stock. And that's what happens in recessions,
growth stocks become value stocks. Then the market recovers, and eventually another bull
run, and growth stocks go back to p/e's around 100 or so.