Is Tesla Stock a Buy After Earnings Miss?!

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Market News and Short-Term Predictions

It's been a tough start to the year for Tesla shareholders. As one of the magnificent 7, they have not joined their peers with a green start to the year. The stock is down 27% year-to-date after their latest earnings, which I tuned in for. 

Let's rip the band-aid off and dig into the results and my thoughts as TSLA has been on my stock watchlist, so I've been waiting for a correction in valuation.

High-Level Earnings Results:

• Q4 Non-GAAP EPS of $0.71 misses by $0.03

• Revenue of $25.17B (+3.5% Y/Y) misses by $590M

• Capex: $2.3B vs. $1.86B in 4Q22

• FCF: $2.06b vs. $1.42B in 4Q22

• Total revenue grew 3% YoY in Q4 to $25.2B. YoY

My thoughts:

The biggest problem I see with Tesla is not a lack of growth, but a slowdown in growth and margin compression. 

Their YoY growth in car sales was only 1% while the other areas of the business like energy and service revenue grew at a faster pace. The slow growth is not due to deliveries as that grew 20% YoY, but the issue was lower pricing.

Their margins are also shrinking due to lowering their prices to remain competitive with their competitors that are entering the market with force. Since a majority of their revenue derives from auto sales, this price sensitivity is putting downward pressure on their profitability metrics. They are getting more in line with other car companies like Toyota which has an operating margin of 12.6% TTM.

There are some positives that I did see though. Their energy business is growing nicely with supercharger revenue and energy storage both leading the charge.

Below you'll see the exponential growth of supercharger locations. If EV adoption continues to grow, that will ramp services and other business revenues.

They also mentioned that COGS per car is steadily improving. Elon mentioned next-generation manufacturing a couple of times on the call, so I hope that the cost of goods continues to improve (going down) as technology is deflationary compared to using human capital to build cars over the long term.

That may also be why we are seeing a bump in Cap-Ex as they are ramping up production of next-gen vehicles.

Let's shift to valuation.

Now I will admit that Tesla shouldn't be valued like other car companies. They are working on more product lines and are trying to push the boundaries of innovation. For instance, Optimus their humanoid robot, or FSD, or manufacturing tech, or AI does demand a premium that will involve some sort of speculation.

Unfortunately for Tesla, their valuation is based on growth and the market needs to see some of that hype around futuristic products materialize. Ultimately, this slowdown in growth isn't lining up with expectations, so we see a compression in valuation multiples. 

With a current P/E ratio of 59, the expectation would be at least +20% net income growth YoY for the foreseeable future. On the call, they did say that they would not be hitting that 50% CAGR that they have called for in the past. They also mentioned that with a shift towards next-gen cars, there may be a slowdown in growth.

I'll admit there are some headwinds they are facing that are out of their control. For example, interest rates spiking is causing the affordability of people to buy new cars to go down, if we get a lowering of the federal funds rate and lower interest rates as a result, there could be a demand bump.

I think at a current market cap of $580B, buying here would mean you think they deliver on more than being a car company. If they do truly become a robotics/AI company they have a chance to become at least a $1 trillion company.

I think if that's the case, dollar cost averaging here makes sense as there could be more downward pressure as weak hands panic sell the earnings. The weekly RSI is only at 35, so I could see the stock pushing to the $160-$170 range with downward momentum.

If you think that most of their futuristic products will flop and they deserve a P/E more in line with a growing EV company, that may be more like a P/E of 20. Then the stock has lots of room to fall still (below $100).

Investing in Tesla will always involve faith that they will deliver. Based on the past they have, but the more futuristic promises are made the harder it will be to deliver. If they do deliver on AI/Robotics/FSD, then it's a decent time to buy with the pessimism and weakness in my opinion.

Enough about Tesla haha. 

Taking a quick look at the general market, I think the market is a bit overheated. With both a daily and weekly RSI over 70, it feels like the market is running on fumes to the upside. A pullback of at least 2-5% would seem reasonable in a bull market.

Lessons to Be Learned

Today I saw what I call a sympathy move in the markets. What happened? Humana (HUM) reported earnings and reduced their forecasted profits substantially which took other health insurer names down with it. 

The funny part is names like UNH already reported earnings. They already had given their caution in their own earnings call earlier on! Does this mean UNH will suffer the same fate exactly as Humana which is a much higher medical cost ratio than expected? Not necessarily.

Regardless, the lesson is you can own a stock, and that company may have done nothing wrong and be down because another stock in the same industry shit the bed.

Portfolio Update

Stock Watchlist

Stocks: TSLA, LLY, CHDN, ADSK, SBUX, NOW

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