The recent weakness in Tesla is due to the outlook that interest rates will stay higher for longer reducing demand for cars and potentially the global economy is entering a stagflation environment which will be bad for cyclical sectors such as the car industry. Finally, the troubles in the Chinese economy is bad news for Tesla as the Chinese market is an important EV market. Today Tesla has announced its second price cut in China in just three days. While it can signal confidence that lithium carbonate prices are to fall again it can also be a sign that the Chinese market is weaker than estimated or competition has simply increased. In any case, it points to lower margins which has already been the case since Q1 2022 when the gross margin and EBITDA margin were 29.1% and 23.9% respectively compared to 18.2% and 14.3% in Q2 2023.
EV adoption is getting closer to an inflection point for crude oil
We have updated the figures for EV deliveries in Q2 2023 and expanded our tracking to 15 car companies. Last quarter saw 1.54mn deliveries a new record for battery electric vehicles (BEV) crossing the cumulative 10mn mark since Q1 2020. Tesla’s market share has fallen from estimated 67% in Q1 2020 to around 30% in Q2 2023 which is more or less unchanged from a year ago. The 30% stable market share is an interesting figure as it is roughly three times Toyota’s current global market share. If Tesla is able to keep its market share as the global car converts to selling only BEVs then one could make the argument that Tesla should be valued at three times the value of Toyota. Interestingly enough, this is also the current yardstick applied by the market. Toyota’s market value is currently $265bn compared to Tesla’s market value of $739bn. This is of course a simplistic and not realistic approach.
What is still striking about the global car industry is that the combined value of the 22 largest carmakers (pure EV makers and the ICE makers) has risen to $1.9trn from $0.7trn in December 2015 outpacing growth in global car production over the same period suggesting that investors are still discounting that the value of BEVs in the future are higher per car than the current ICEs. This assumption is still one of the biggest key risks to investors in Tesla and other EV makers. Will BEVs really have higher operating margins in the future than ICEs?