Be cautious if you are invested in Tesla. Even with their amazing results
With results that hit the ball out of the park. Beating all expectations, and a valuation that big tech stocks could only dream off.
A fantastic quarter from a company and CEO that is closely watched across the globe. For reasons spanning from innovation, or South Africans watching “one of their own” making a success that many could only dream of.
On the face of the third-quarter earnings, you can be very optimistic. With a strong cash generation, the fourth quarter of profits, meeting production and delivery demands and impressive growth in the Model 3 and Y ranges of more than 50% Year on Year. This excludes other innovations currently under the Tesla belt like batteries (Which is becoming a significant focus).
With all the optimism, why should you not be too optimistic about the valuation and share price?
Tesla’s CEO, Elon Musk recently stated that they want to drop the prices of the cars that they manufacture even more. Already have cut deep into the prices that they charge consumers for their products. The problem with this philosophy is that they are not making any money on the vehicles that they sell.
Sounds weird, as they did make a profit right?
Yes, but if you look at the results closely, there is a line item called Regulatory credits. These credits are earned by selling a mandated quota of zero-emission vehicles in specific regions. Tesla sells these credits to automotive companies that do not meet their mandated quota. Some do believe that Tesla relies too much on these credits. The profit (gross) profit margin on these credits are 100%, and if we look at the quarterly revenue, $397million came from regulatory credits, while the net income came to $331 million.
Although, the idea of selling these credits is brilliant. Is it sustainable? With other manufacturers ramping up their R&D, it is not too far-fetched to assume that this revenue stream is not sustainable for the long-term, and at some point, the well will dry.
Maybe an even bigger concern, one that you should definitely have is the share price or valuation of Tesla. Taking into consideration the growth YoY and QoQ, we estimate the EPS to be around $1.16 for the full year. At the current price of $409.19, it puts the price/earnings or PE ratio at 352. The valuation continues to appear steep.
Many have been wrong when punting that Tesla is overvalued. Maybe I am too. But I would still rather err on the side of caution with this one.
