Head of Equity Strategy
Summary: Tesla shares are cooling a bit in pre-market trading after a 7% gain yesterday on no news. The EV-maker is raising $5bn in capital extending its cumulative capital raise this year to $12bn as Tesla is experiencing increased competition in its two key markets Europe and China. While the equity market is pricing Tesla for perfection the October sales figures in Europe show that Tesla is slipping in sales ranking not even making it to top 10 on fully electric sales.
Tesla shares were up another 7% yesterday on no news extending this year’s gains to 662% as sales of electric vehicles has defied the overall plunge in new car sales due to the Covid-19 pandemic. As a result, Tesla is expected to grow revenue by 26% reaching $31bn and analysts expect 2021 to see revenue growth accelerating to 49% y/y reaching $46.3bn in revenue. With Tesla’s market value now at $608bn on expected free cash flow of $2.6bn in FY21 and revenue of $46.3bn analysts must ask themselves what they are not seeing that investors are apparently seeing.
To bolster its balance sheet and expand faster as competition is seriously heating up in both Europe and China, its two most important markets except for narrow California, Tesla has decided to raise another $5bn in capital making it the third capital raise this year and bringing the combined capital raise in 2020 to $12bn. The cash balance will get close to around $20bn after this capital raise providing enough resources to meet competition and expand the line-up. Shares are down 4% in pre-market on the news of the capital raise.
Does the rubber meet the reality of the road?
The bull case often includes self-driving technology eventually catapulting Tesla from an ordinary EV-maker to a company leasing on-demand autonomous driving cars to the consumer globally. On top of that the bull case also often includes extraordinary battery technology (we wrote about Tesla’s Battery Day in September) and a significant energy business.
Uber’s decision today to sell its self-driving technology is another sign that the dream of self-driving cars is far into the future as the technology is more difficult to develop than initially thought. The biggest challenge in autonomous driving is what is called ‘corner cases’, that is situations that happens rarely but often turns into life threatening events. Due to the rarity of these events that are difficult to generalize well in deep reinforcement learning algorithms.
While Tesla seems to be advancing ahead of the competition for now in battery technology, we find it unrealistic that Tesla will continue to have a lead on battery technology as most hardware applications have tendency to converge over time. In terms of the energy, it has lately delivered high growth rates increasing to $579mn in FY20 Q3 up 44% y/y but generating only $21mn in gross profit. In other words, the energy business has an attractive outlook but has not reached a scalability or technology inflection point where it is a profitable business for Tesla.
The most dramatic develop for Tesla in 2020 and something we have recently flagged on our morning podcasts is how Tesla has slipped in sales ranking in Europe. In October, the plug-in vehicles share of new passenger sales reaching 13% with fully electrics reaching a 6.5% share. This makes the European penetration rate of PEVs twice as high as China an almost five times higher than North America. The numbers are clear, if you want to become the biggest EV-maker in the world you must dominate the European or Chinese market. Tesla is playing abroad in these two markets and our view is that consumers will tend to prefer local consumer brands or foreign brands. That is bad news for Tesla and our nervousness seems to be proving right with Tesla not even in top 20 on plug-in sales in October in Europe and not even in top 10 on fully electric. Volkswagen’s ID.3 and Renault Zoe are dominating the sales ranking in Europe and while it may be a timing issue that Tesla has slipped out of top 10 it is a big worry. Especially, because Tesla is priced for perfection in equity markets.
From a technical point of view, Tesla’s put/call interest ratio fell to 1.39 yesterday, the lowest level in three years. The ratio measures the outstanding put options relative to call options with the ratio typically above one reflecting hedging demand from institutional investors. The current level reflects the strongest bull skew in the options market in three years. If you combine that the recent sales numbers in Europe and the increasing competition, then clouds look darker than 12 months ago.
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