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EV fears turn real on big Tesla miss on Q1 deliveries
Peter Garnry
Chief Investment Strategist
Key points
- Tesla's Q1 deliveries missed estimates by a significant 14%, the biggest miss in their history. This is due to a combination of factors including transportation issues, higher interest rates, and lower consumer demand for EVs.
- Tesla's valuation is currently high compared to peers and future growth expectations. The company's future success depends on securing a large global market share in EVs and maintaining a strong return on invested capital.
- This situation serves as a cautionary tale for investors, especially regarding companies like Nvidia that are priced with very high future expectations. A change in these expectations can significantly impact the stock price.
The big miss
Fears about Q1 deliveries were already developing among analysts covering Tesla, but those fears turned into a nightmare as Tesla announced Q1 deliveries of 386,810 vs est. 449,080. The figure was lower than the lowest estimates and fell short of estimates by 14% which was the biggest miss in the company’s history. As the chart below shows, the growth in deliveries have slowed down significantly for Tesla and while transportation disruptions in the Red Sea are a factor in the miss it cannot explain it all. Higher interest rates and issues related to EV grid infrastructure are also playing a role in lower consumer demand. Investors in Tesla will note that a big QoQ decline in deliveries has happened before and Tesla has always bounced back stronger.
What comes next?
The big question is what happens to Tesla from here. Many retail investors are long Tesla shares from a higher level.
If we start with valuation, then Tesla is priced at 29x operating income over the next 12 months. For comparison, BYD is valued at 5.8x operating income over the same period. To make the relative valuation more odd, BYD is expected to grow revenue 25% this year compared to Tesla at only 10% growth. US equities generally trade at a steep premium to all other markets, but it is clear that the market is reluctant to invest in Chinese companies while maintaining very lofty expectations for Tesla.
Another way of figuring out some yardstick for Tesla is by looking at Toyota. If assume Tesla ends up at the same market share (roughly 10%) and gets to the same operating margin, then the EV business is roughly worth $350bn compared to the current market value of Tesla at $531bn. Of course, Tesla has its energy business and there are other real options embedded in its valuation.
Two things will be crucial for Tesla going forward. The growth in EVs will continue for decades to come, but it is the global market share in EVs that will be the key factor to monitor for investors. The other important factor is Tesla’s return on invested capital which is roughly around 10% and much better than anyone else in the industry. But if Tesla, due to competition, sees its ROIC going down to the industry average then that is another risk factor to consider for investors.
A lesson in expectations, Nvidia investors pay attention
Tesla shares are down around 60% from its highs in late 2021 and it is an important lesson for investors in expectations. There are company results and then expectations set by investors in the equity market. Shares move around when expectations change.
In late 2021, Tesla had a market value of around $1.1trn, revenue of $54bn and EBITDA of $10bn. The share price was priced for a very high global market share in the future of well over 25% eclipsing the current 10% market share of Toyota, the biggest carmaker in the world. Fast forward to today and the share price is down 60% while revenue is at $97bn and EBITDA is at $13.6bn. For newcomers to the equity market this seems odd. How can the stock price be lower when revenue has doubled and operation profit expanded by 36%?
Because expectations today are very different from those in late 2021. Back then expectations did not accurately reflect the coming EV competition, especially from Chinese EV makers, and the impact on interest rates from inflation.
This is an important lesson for investors in Nvidia as this company is also priced for perfection and future that might look very different in three years from now. Nvidia could also face a doubling of its business and profits while the stock price is down. All it takes is for expectations to change.Recent notes on equities
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