Tesla: Turning Bearish With Mounting Competitive Pressures

seekingalpha2021-05-28

Summary Tesla has enjoyed a relatively smooth ride through the EV market as hype and technological leaps lured customers into their phenomenal products. However, as competitive pressures in both the ...

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Tendollar
2021-05-30
Tendollar
With Big 3 also coming into EV, Tesla will face competition and thus low profit margin.
nickname223
2021-05-28
nickname223
Short?

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Major automobile manufacturers like Ford(NYSE:F), Volkswagen (OTCPK:VLKAF) and General Motors (GM) as well as newcomers, primarily in China, like NIO (NIO) and XPeng (XPEV), are set to hit the market with direct competition to Tesla's brands and given where earnings and revenues growth projections stand - I've once again turned bearish.\nA growing industry, but so are the players\nThere's no question that the EV (electric vehicle) market is the future of the automobile industry. Even as it remains a smaller part ofthe automobile industry as a whole, only 45,000 EVs were sold in 2011 and in 2020 there were 3.24 million. Even more impressive is that by 2030 analysts expect there to be 27 million EVs sold annually, representing about a third of all global vehicle sales. This presents a CAGR of about 21%.\nTesla sold just under 500,000 vehicles in 2020, meaning they have a market share of ~15% of total EV sales worldwide, an impressive feat for a company which just a few quarters ago wasfacing bankruptcy speculation. Even so, sales have been surging due to the lack of viable alternative options and the continued \"uniqueness\" of the brand, something which virtually no analyst or car specialist expects to continue beyond 2021.\nThis is because of existing automobile manufacturing behemoths aggressively entering the space with electric versions of very popular vehicles of theirs, like the Ford F-150, alongside classics from the likes of General Motors, Volkswagen and luxury brands like Audi (OTCPK:AUDVF), Mercedes-Benz, Porsche (OTCPK:POAHY) and others.\nHere are some of the new vehicles set to 'hit the road' in 2021:\nWith these vehicles and their price ranges, as well as the dozens of affordable and luxury EVs already on the road or in the rollout process today, competition in the industry is set to accelerate dramatically as Tesla rushes to release new products while meeting demand for their classic models already in production.\nThe aforementioned companies and releases don't include the mounting competitive pressures thatTesla is facing in China from newer companieslike NIO and XPeng, which are set to deliver alternatives in the near future. So much of Tesla's expectations and their road to profitability has come from their blowing past expectations in the Asia-Pacific region and mounting competition and regulations in the region are set to hurt even more than in the Americas.\nWhat does it mean for the future of Tesla?\nWhen it comes to thinking long term about the prospects of the company's share price, it's easy to state that the higher level of competition justifies a lower earnings multiple relative to the ones they've enjoyed thus far. It's already the case that most automobile industryanalystshave trimmed down expectations for the company's growth rate, down from low triple digits just a few quarters ago to, in some cases, single digits in the not-so-distant future.\nThis, I believe, is set to affect the company's sales in various regions. In China, Tesla grew sales from $3 billion in 2019 to $6.6 billion in 2020, a major growth driver for the company and the main reason they outperformed previous expectations. The introduction of competition from NIO and XPeng in the coming months is near certain to set back expectations ascheaper alternatives continue to pour into China.\nIn the US region, Tesla grew sales from $12.6 billion in 2019 to $15.2 billion in 2020. Although it's clear that their orders remain high and it (mostly) comes down to deliveries, there's a strong case against continued growth at this rate given the high-end luxury players entering the market as well as cheaper alternatives to current best sellers from the likes of Ford and other international players like Toyota (TM). There's already some of this baked into analyst expectations for the coming years:\nIn 2021, the company's EPS is set to increase 104%and grow to $4.57 per share. In just a few years, by 2025, that growth rate is expected to be just under 9% and grow to ~$11.00 per share to $12.00 per share. Sales are affected as well, with 2021 sales expected to grow 57% to ~$49 billion and in 2025 are expected to grow just 18% and reach ~$131 billion annually.\nBy no means are these figures bad. They represent the fast growing EV market and demand for current, planned and future products by a company which by many metrics revolutionized the way we think about cars, electric vehicles, autonomous driving and automobile technology in general.\nEven though these figures are not that bad, it does begin to concern the company's overall position. Tesla does have just over $17 billion in cash on hand but is paying roughly $1 billion in interest expense annually on ~$11 billion in long term debt and other obligations. Given that Tesla requires new and exciting products to maintain the high growth rate and thus cash generation, a meaningful slowdown in sales and income growth coupled with the high R&D and other production expenses (Berlin gigafactory) means the company is never too far away from slipping back into the precarious situation it found itself in the past.\n\n(Source: Seeking Alpha)\nWhile sales are growing at an impressive rate now, expenses have been growing 12% to 20% over the past few years, along with a steady growth in interest expense. A meaningful slowdown in sales growth means we'll see significant strain on the company's ability to generate meaningful cash flows.\nAnd when it comes to near-term valuation, slowing growth rates means lower multiples.\nValuing a 2021 to 2025 Tesla\nCompanies like Toyota, General Motors, Ford and others are currently expected to grow earnings are around 10% to 20% the pace of Tesla (a tenth to a fifth of the growth rate), and are trading at around 8-10x forward earnings. Given Tesla's EPS projection of $4.57 per share whilst growing 10x as fast, to $12.00 per share whilst growing 4x as fast, an earnings multiple of 100x to 50x seems appropriate for the company's share price.\nThis estimates that the fair value of Tesla in 2021 is $457 per share, significantly lower than its current price of ~$585 per share. However, looking forward, fair value for the company based off 2025 EPS projections sits at around $600 per share, meaning a very low return over the next 4 years.\nThus, I believe that the company is fairly valued to slightly overvalued in the longer run and as I said in previous times, is currently \"flying high\".\nRisks of avoiding growth behemoths remain\nAlthough I believe Tesla is slightly overvalued and may not be a good a 4-5 year term return on investment, I still think that the company has immense value given the technological advantages it has.As I've stated in a previous write-up, I do believe that next decade will be fairly good to Tesla given the expected widespread adoption of autonomous driving, solar technology improvements (including the upcoming $3 trillion green infrastructure investment bill expected to come from the Biden administration this year) as well as the potential partnership/merger with founder's Elon Musk's other initiatives like SpaceX and The Boring Company, among others.\nWith all of those risks, I strongly believe that shorting the stock as it returns to fair value is a bad idea. That being said, I do believe that Tesla's near term (3-4 year) future is going to be bumpy and have turned slightly bearish on the company.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":137732954,"gmtCreate":1622389207878,"gmtModify":1704183739030,"author":{"id":"3574249039232152","authorId":"3574249039232152","name":"Tendollar","avatar":"https://static.tigerbbs.com/f605c975630017596221e6b84fd5350f","vip":1,"crmLevel":4,"crmLevelSwitch":0,"idStr":"3574249039232152","authorIdStr":"3574249039232152"},"htmlText":"With Big 3 also coming into EV, Tesla will face competition and thus low profit margin.","listText":"With Big 3 also coming into EV, Tesla will face competition and thus low profit margin.","text":"With Big 3 also coming into EV, Tesla will face competition and thus low profit margin.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/137732954","repostId":1139716559,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":135795436,"gmtCreate":1622182348525,"gmtModify":1704181037804,"author":{"id":"3581719514650082","authorId":"3581719514650082","name":"nickname223","avatar":"https://static.tigerbbs.com/3c9d3ce9ebd1f38f8f9c780ce1096cdd","vip":1,"hat":"https://static.tigerbbs.com/a3dee1aa3a3a3c1814833a4d3f8a5669","crmLevel":2,"crmLevelSwitch":1,"idStr":"3581719514650082","authorIdStr":"3581719514650082"},"htmlText":"Short?","listText":"Short?","text":"Short?","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/135795436","repostId":1139716559,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":20,"commentSize":2,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1139716559"}