I am not a Tesla Inc (NASDAQ: TSLA) bull.
In fact, I have been quite critical of the company ever since I started investing.
Especially when it comes to Elon Musk, whom I think is just too volatile when it comes to handling the public relations of the company.
You would never want your CEO to sell shares of the company, driving share price down, just to buy over his favorite social media company.
The latest price cuts which dominated Tesla Inc.’s Q1’23 results are yet another wild card, that not only punishes the share prices of Tesla but also other Chinese EV makers.
But, here’s why I think, that all of these short-term pain, could bode well for the longer term.
1. Price cuts to continue fueling the growth
Tesla’s growth seemed to have normalized and plateaued a bit.
Yes, they still did grow 24% YoY.
But automotive revenues only did 18% YoY. Which you might again argue is not too shabby.
But taking things into perspective, for whatever business to have 4% of the market share in the US/Canada, and still be the largest EV seller, don’t you think the growth rate should be much higher than 18%?
Under an inflationary economic climate, goods and services should be much more expensive as companies would pass on costs to their consumers.
But for big item purchases like cars, where Tesla has already encountered challenges in boosting its topline further. They would have run out of aces on their hands before resulting in price cuts.
Profitability will and needs to be sacrificed. But judging from the fact that Tesla is still heavily invested in utilizing its assets and manufacturing facilities, not growing market share and sales would spell more trouble in future earnings.
2. Still an above-industry operating margin
Listed car manufacturers are dirt cheap if you look at their P/E ratio.
VOLKSWAGEN GROUP (ETR: VOW3) is trading at a 4.12x P/E ratio, and Bayerische Motoren Werke AG (ETR: BMW) is at a 3.71x P/E ratio.
Elsewhere, Toyota Motor Corp (TYO: 7203) has a P/E ratio of 10.13x, while General Motors Company (NYSE: GM) trades at 5.56x P/E.
Car making for the mass market is not a sexy business when it comes to margins. And non-sexy margins mean cheap valuation.
For years, no one would have imagined car manufacturing to churn out lucrative profits.
Even though Tesla’s margins are not in the league of SaaS companies, judging from its historical improvements and current achievements, it is nearly 2 times higher than the auto industry operating margins.
So when the company opted to slash prices, yet still maintain its position as one of the car makers with the highest margins, the stock prices got penalized.
3. The EV business is more than just selling EVs
To put this point into perspective, I would like to bring up Microsoft Corporation (NASDAQ: MSFT) and Apple Inc. (NASDAQ: AAPL) as good examples.
The Microsoft founded by Bill Gates is now more than just MS-DOS or Windows. It has become one of the leading cloud computing companies, offering enterprise resource planning, and even productivity applications.
The Apple that Steve Jobs founded, is more than just Macintosh computers and iPhones. There’s App Store, Apple Music, and Apple TV now.
The more these 2 companies diversify and grow, the stronger they become, the more complete their ecosystem is.
Now apply the same theorem to Electric Vehicles. From battery technology to automobile software, self-driving technology, and charging networks, Tesla is the only company that can proudly claim it has the technological know-how for all aspects.
Granted that the financials for Q1’23 were lackluster and missed expectations, one should disassociate from being an analyst and think like a venture capital or hedge fund.
Solar and storage deployed continued to grow with speed. Although these figures contribute nothing to the current top and bottom line, they may so in the future.
Also growing are the Supercharger stations and Supercharger connectors. Selling an EV not only requires the EV to look nice and affordable but it too must also overcome the key obstacles – driving range and charging networks.
If riding on the EV trend for short-term swings is your cup of tea, then the listed Chinese EV makers would provide more thrill and opportunities.
But if you are in for the long ride (pun intended), wouldn’t Tesla’s business model and plan excite you more?
Long-term gain?
To reiterate, I was never a Tesla bull, and have never profited from any short or long positions on Tesla.
I started off as a critic when Tesla’s main profit contributed via selling carbon credits.
I still am.
But as the company matures and grows, be it by chance or luck (most of its growth happened in a low-interest rate economic landscape when money was dirt cheap), this short-term challenge should not pose any significant challenges to the company’s prospects and catalyst.
The company is fine and should weather this storm if you agree to my observations and reasonings.
In fact, I think the unpredictability of Elon Musk poses more threats to the stock price volatility than the price cuts on their cars!
Alvin shares his thoughts too:
