Toni Sacconaghi, an analyst at Bernstein, generated some headlines on 27 March when he reduced his price target for Tesla (NASDAQ:TSLA) stock to $120 — 30% lower than its price at the time.
Blaming a dated model line-up and increased competition, he said: “Tesla’s stock price remains high on almost every valuation metric compared to both traditional and higher-growth auto [manufacturers], and also looks expensive relative to its reduced growth expectations when measured against tech companies.”
But what’s new? For as long as I can remember it’s been expensive, which is why I’ve never bought the stock.
The big issue
However, Sacconaghi’s comments highlight — what I believe — to be the fundamental problem. Is Tesla a carmaker or a technology company? Only when this is resolved, is it possible to make an informed investment decision, I feel.
Chart by TradingView
The chart below shows the company’s price-to-earnings (P/E) ratio over the past five years. Although it’s fallen recently, it’s still higher than that of tech giant Apple. Ford‘s P/E ratio is 70% lower than Tesla’s.
Personally, I think Tesla is a car company. Yes, its self-driving technology could revolutionise the industry. But other mainstream manufacturers, including Ford, are developing their own versions. Tesla’s all-electric model range sets it apart from most, but its technology isn’t as unique as some might think.
If I’m right, then the stock is significantly overvalued. And looking at its balance sheet, the disparity between its stock market valuation and its underlying value is even more stark. It has a price-to-book ratio of 8.9, which dwarfs that of Ford (1.2) and General Motors (0.9).
Chart by TradingView
Major challenges
In the face of increased competition, the company has embarked on a series of price cuts. And as shown below, these have damaged its gross margin.
Comparing December 2023 with two years earlier, its automotive margin has fallen by 9.8 percentage points. On a $50,000 car that’s $4,900 less profit. Multiply this by 1.8m vehicles — the number it sold in 2023 — and the loss of earnings becomes $9bn!
Chart by TradingView
And sales for the first quarter of 2024 are 8% down on the same period in 2023.
A more positive view
This all sounds rather gloomy but Tesla has proved the critics wrong many times before.
And it’s easy to overlook that the Model Y was the best-selling car of 2023. This includes those with petrol and diesel engines. The company also regularly tops surveys of brand loyalty.
I’m also intrigued by Elon Musk’s recent interview with Don Lemon. When asked about the new version of the Roadster he said it would be a collaboration with SpaceX, and that it would incorporate “rockety stuff”. He went on to describe it as “something that’s never existed before” and “not even really a car” with drive-by-wire technology. If that wasn’t enough, Musk claimed it will accelerate from 0-60 in less than one second. I can’t wait!
It’s also true that the views of Sacconaghi are not shared by all. According to CNN, of the 51 analysts covering the stock, 17 rate it a ‘Buy’, 24 say ‘Hold’ and 10 advise to ‘Sell’. Their price targets range from $68 to $320.
But despite its recent fall, I still think the stock looks expensive so I don’t want to invest at the moment.
