Tesla's Continuing Crash
Summary
- Since my first cautionary article on Tesla on November 16, 2021, the stock price is down 29.8%.
- That is far worse than market declines generally, so it cannot be blamed on that.
- The causes were in part self-inflicted.
- More of those are now being programmed in that - together with external factors - will further lower Tesla's still excessive market value.
- I shall expand on those internal and external problems that will worsen the crash.
Pavel_Chag/iStock via Getty Images
In past articles on Tesla, Inc. (NASDAQ:TSLA), I have emphasized my like for the cars and my admiration for what Elon Musk has achieved, proving that a visionary can also put visions into practice. Others have turned their admiration into near worship, and that has inflated the stock market valuation to unrealistic highs. At the time of my first article Tesla’s Ticking Time Bomb on November 16, 2021, the share price was $1,054.73. The last closing price as I write was $740.37; a fall of 29.8%. A few days before, on November 4, it was $1,229.91; a fall since of 39.8%.
I tried to put a balanced view in that article and subsequent ones as the crash continued, but many still believe Tesla’s stock price has nowhere to go but up.
I shall detail threats later, but first I shall review a bit of what we know about...
Tesla’s Financial Performance
Tesla’s website does not yet show financial results published on April 22, 2022, so I had to search elsewhere for them. I found the following table on electrek.co:
Electrek.co
The figures look very good, especially the automotive gross margins at 32.9%. That is well above the gross margins achieved by traditional car makers. Material cost increases have been recovered through selling price increases.
Cash flow was super, too, leaving Tesla with approximately $17.5 billion in cash at the end of the last quarter.
One important point to be considered when comparing Tesla’s gross margins with those traditional car makers is that the drivetrain in an ICE vehicle contains around 2,000 moving parts, whereas the drivetrain in an electric vehicle ("EV") contains around 20. That means much lower material costs, and, therefore, the margins of traditional car makers will also improve as their production of EVs becomes a bigger portion of their output.
What is not good is the drag on margins caused by the solar business. CEO Elon Musk likes to claim Tesla is vertically integrated, but that side of the company has nothing to do with the main business of car making.
Those selling price increases I mentioned above are also pushing Tesla cars further and further out of the reach of many buyers that Elon Musk has claimed he is aiming for as he builds more giga-factories, buyers Tesla needs if he is to sell the 20 million cars he aspires to make each year.
Also I cannot find anywhere provisions for the many legal claims against the company. They are potentially huge and are among these threats...
Threats - self caused
Safety Recalls and potential profit hit
U.S. Federal law requires all safety recall repairs to be provided free of charge on cars that are up to 15 years old. Most Tesla cars are still less than 5 years old.
In Germany, periodic technical inspection (Hauptuntersuchung/ TÜV) is required. By law, all vehicles must be routinely tested to ensure they meet German safety standards. After a car has been in use for three years, it must be tested every 24 months. Many Tesla cars have fallen into this for the first time, and this report by Car-Recalls.eu for 2021, published on Jan 29, 2022, ranked Tesla's Model S as the 126th worst model out 128 models tested! This is an excerpt from that report:
"the headlight issue plays a role, but also wishbones faults, resulting in a huge failure rate of 10.7 per cent! This means that approximately one in ten Teslas fails their first inspection.”
It also causes the owners much inconvenience while their cars are off the road, and Germany is one of the world's biggest car markets.
All costs for those many problems must be paid for under its warranty that extends for 4 years or 50,000 miles/80,000kms. Tesla makes a warranty allowance in the P&L at the time of recording the sale of a new car. This may prove to be insufficient. According to warrantyweek.com, "the world's automakers accrued an average of $676 per vehicle sold last year (2020), up significantly from $536 in 2019." Since Tesla is proving to be worse than average, its costs are potentially higher than provided for in its warranty provision. That might not have been a significant amount so far because Tesla did not have many cars on the road until last year and profits are calculated at the date of sale; those costs come later.
Tesla sold nearly 1 million cars last year, and I calculate there are around 1.5 million older ones still covered by warranty. Any costs above the provision will hit future profit figures, but worse is the cash hit on the whole. Those fixes are cash costs at the time of the fix and have not been provided for as a cash reserve, as far as I can see.
Assuming 500,000 cars need a safety recall or warranty fix this year at that average cost of $676 per car, then the cash hit will be $338,000,000. As more cars go on the road, the cash cost will go up accordingly. Tesla’s super free cash flow can take that at present but that cash could also be used in better ways for shareholders in terms of a dividend or share buybacks.
Lawsuits
Wikipedia has this list of lawsuits against Tesla. I know of no other reputable company that has stirred up so much controversy. The “autopilot” - the word used by Elon Musk to describe Tesla’s driver assistance technology - fatality case could prove to be fatal or near fatal for the whole company. An NHTSA investigation already underway covers 765,000 vehicles, almost everything that Tesla has sold in the U.S. since the start of the 2014 model year. Of the crashes identified by the National Highway Traffic Safety Administration as part of the probe, 17 people were injured and one was killed.
NHTSA says it has identified 11 crashes since 2018 in which Tesla cars on Autopilot or Traffic Aware Cruise Control hit vehicles at scenes where first responders have used flashing lights, flares, an illuminated arrow board, or cones warning of hazards.
Currently, in a car accident in the U.S., the driver of one car sues the driver of the other car. It is only very seldom the car manufacturer is sued. For self-driving cars, however, things will be different. There aren’t other drivers to sue. There is just the car - and the company that made it. It won’t take long for plaintiffs’ lawyers to start filing big lawsuits, even class actions, against the car and technology companies that made the cars and designed the self-driving technology. And, as we have seen in other such situations, there could soon be billion-dollar judgments against Tesla.
Tesla’s CEO
I mentioned my admiration of Elon Musk in my opening statements above. That admiration for the positives he has achieved will remain, but I believe he is stretching himself too far. He appears to making himself a one-man conglomerate. He has made a bid for Twitter (TWTR), a company not remotely part of the vertical structure he claims differentiates Tesla from other car makers, plus there are the many other companies he is involved with according to this Business Insider list. He also bulldozes through country bureaucratic procedures as though he is above all. Those things could backfire on Tesla.
Expansion
Sauer Energy has just recently reported that Tesla may build a car and battery factory in Indonesia. The facility may come up in Central Java’s Industrial complex. In my view, Indonesia could pose a big threat to Tesla. I had many years of experience dealing with Indonesia when heading up the operations of leading U.S. and German companies in the region. Indonesia may be one of the most corrupt countries in the world. Transparency International ranks it the 102nd out of the 180 countries that it measures.
Getting almost anything done there requires payments that could conflict with the US Foreign Corrupt Practices Act. I know of no major U.S. company with manufacturing operations there, perhaps because of that.
Tesla plans to expand its giant German factory even before the existing one is fully operational. This electrek.co report tells more about that. That means more protests over tree destruction and stresses on water supplies. Elon Musk ignored those and bulldozed through normal bureaucratic procedures to get the existing factory built. Great that he got things done quickly, but that also caused great resentment. Way back in 1697, English playwright, William Congreve, coined the phrase Hell hath no fury like a woman scorned. One day, those scorned bureaucracies and environmentalist might get their revenge.
Likewise, he is making no friends in an important German industry where union representatives sit on some car company boards - and politicians might also have a vote - by employing non-union workers who live in nearby Poland and will commute by car to work in the German factory for much less than the normal German pay rate.
In my view, he would serve Tesla investors better by getting all things running well in existing plants and focus on the small but high-priced, high-profit end of the car market and forget his idea of scaling up to “extreme size”.
The latter may not be possible anyway due to...
Threats - External
China might pose the biggest threat
Geopolitics may adversely affect foreign car makers sales in the world’s biggest EV market. President Trump started trade wars and imposed sanctions on many Chinese goods, and now President Biden has been making noises about Taiwan. I will not get involved in the blame game of who provoked who, but China has its own way of retaliating against countries that offend it. Australia did so and soon found its universities - that were heavily reliant on fee-paying Chinese student- no longer had such students. The number of Chinese tourists and buyers of property there dropped, too.
Even without apparent political nudges, the Chinese people are showing preferences for Chinese brands, as Reuters tells in this article titled Global automakers face electric shock in China.
That could hurt Tesla especially hard given its huge investment in a gigafactory there.
China and SpaceX
Elon Musk’s SpaceX company may also compound Tesla’s potential problems in China. The South China Morning Post recently had an article titled China military must be able to destroy Elon Musk’s Starlink satellites if they threaten national security. That could also compound Tesla’s potential problems in China.
Competition
This is growing constantly and fast. Every major maker is spending billions on EVs. Recent news adds a jv between Stellantis (STLA) and Samsung (OTCPK:SSNLF) to build a $2.5 billion battery factory in Indiana. General Motors (GM) is spending $7bn to convert an existing factory to make EVs. That shows another advantage traditional car makers have over Tesla. It costs less to convert an existing plant to make EVs than to build a new one from scratch, plus they have an established workforce and customer base.
A report on SA tells us that GM's all-electric Hummer draws rave review from Barron's.
Non-U.S. companies are likewise spending huge sums at home and in the U.S. to build EVs and battery factories.
Ford (F) is spending $11 billion on plants in Tennessee and Kentucky, and plans to build 600,000 EVs by the end of next year.
Ford is a potentially very big problem for Tesla in the huge U.S. truck market with its F150 model...
Ford 
It is now on the road, and I suspect most buyers will choose that over the strange looking thing that Tesla might sell next year after several delays...
Tesla 
Of course, it will attract some buyers who like to look different, but it could prove to be just a fashion fad for a few and Elon Musk is aiming at the mass market. Those sharp edges are also dangerous and could cause serious injuries in accidents with pedestrians. That was the reason cars became more rounded back in the 1970s and could lead to more lawsuits against Tesla one day.
Slowing car sales
A report I found on SA says the average age of cars in the U.S. is now 12.2 years and has been heading higher for five consecutive years now. That is happening also in European countries and one of those is going nowhere...
Britain
Britain is the world’s 5th largest economy - for now - but it is in or close to recession and in many cases it is not working. A recent report in the Financial Times tells us that “the number of people in work or self-employed is still 500,000 lower than the pre-pandemic level with roughly 900,000 fewer working today than the Bank of England expected in forecasts made just before coronavirus struck,” and that "What is most worrying is that this is a UK-specific problem. Now that the US has managed to encourage workers back into jobs, the UK has the most persistent post-pandemic drop in employment of any G7 country.”
That means the UK car market will shrink, too.
Recharging Batteries
Power supply systems in much of the West are in a mess. Sixty percent of U.S. distribution lines have surpassed their 50-year life expectancy, and there are estimates that $1.5 trillion to $2 trillion will need to be spent by 2030 to modernize the grid just to maintain reliability. I wrote about that 4 years ago in Pass The Candle, Please. Almost nothing has been done since, so the condition has worsened while demand constantly increased.
Recently, California has been talking about power rationing because of inadequate hydro power this year. In other parts, a bit of wind blows down power lines. Who wants a Tesla or any EV that won’t go anywhere because the battery is flat?!
And who wants to buy into a company whose stock price is going nowhere either?
Tesla’s Battery Has Run Flat
Adding together all the above threats to Tesla's future sales and profits growth, I cannot see anything happening that will recharge Tesla’s market valuation battery.
Elon Musk has an aspiration of making 20 million cars per year by 2030. According to this Businesswire report, the global market is expected to be around 123 million by then. That means Tesla must gain a market share of over 16%. No major car maker has anything remotely near that. Toyota (TM) has around 10.5% with Volkswagen (OTCPK:VWAGY) (OTCPK:VLKAF) in second place at 7.4% Source: Statista. Tesla is not even in the top 10.
Those companies will fight to retain or gain market share, so I suggest it is rather unlikely that Tesla will ever equal the combined market share of the two giants. If those 20 million cars are made, millions could remain unsold and Tesla would be facing bankruptcy. The actual EV market will anyway be much smaller. Global light duty EV sales are forecast to rise to 26.8 mil by 2030, according to the latest analysis from S&P Global Platts Analytics. That makes Elon Musk’s 20 million aspiration by 2030 look even more ludicrous, because he would have 75% of the global EV market!
Tesla’s Continuing Crash
Those many threats need addressing now. The biggest internal one - quality - is fixable, but the external ones are mostly outside the company’s control. Elon Musk - Tesla's biggest asset and a man I once admired - may be becoming a liability for Tesla. He has created enemies by bulldozing through proper procedures and disrespecting different cultures and local wishes in Germany and, in my view, is undertaking too many things at this time.
As Tesla CEO, he should be more focused on driving Tesla less controversially towards the destination he has convinced many it will get to or hand over the reins to someone else.
Until something is done soon to overcome the many threats, Tesla's market value must one day be closer to those of other car makers or less.
A P/E comparison with those shows that means there is a long way down still to go.
Toyota's (TM). PE: 10
Volkswagen's (OTCPK:VLKAF) PE: 4.3
Ford's (F) PE: 4.8
General Motors's (GM) PE: 6.4
Tesla's (TSLA) PE: 102
Of course there will be some bounces up, but the decline over recent months is part of Tesla’s continuing crash trend. I can also be wrong, but the known threats would suggest that new Tesla investors should stay away and existing ones should sell.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (857)
"many scorned in their comments"
Well, sure, by those who don't focus only on a tiny slice of TSLA price history to support their obviously flawed narrative.
I could look at a single TSLA down day and make the same claims as you and be as wrong as you.
It's about the long term, and this has been explained to you.
TSLA will be multiple factors above what it is now in just a few years.
We just need to watch it play out. Minus a global calamity, it's inevitable.
Automotive margins!! GM: 27%. Net: 14%.The solar business is loss making so Tesla’s overall margins must be lower. Bitcoin is a huge loos maker too.Tesla is an upmarket car maker. If I compare those automotive margins with upmarket BMW then the gap is not so great.
BMW’s GM: 18.3%. Net: 14.8%.BMW is therefore better on the important Net margin number.
If we turn to how the market views the two companies it gives BMW a PE of 2.89 and Tesla a PE of 106!That must surely show that something is wrong.
Comparing apples to oranges is SOP for Tesla fans.
TSLA864.51
862.25
-6.63%
You mean the crash of markets all across the world?
"Gravity sucks"
Call it gravity, call it the impact of macro-factors outside of Tesla's control but is really only of a temporary nature.
Whatever you call it, I call it a disassociation between Tesla fundamentals and execution and the Tesla share price.
Most importantly I call it an opportunity to buy into the best investment of a lifetime at a bargain price. I hope it stays at a bargain price until I get an expected August windfall.
Price at publication
$775.00
Change
-7.53%
S&P 500 change
-0.39%
Maykil
I know you didn’t ask me but a good time to have bought was in 19’ or early 20’ when it had negative p/e. Ever since it’s been hugely overpriced including a p/e over 1200 but it’s a growth company so who cares , right?
There are many competitors in self driving too. And several have more advanced systems.
Flat out lies.
People don’t want at EV, they want a Tesla.
You can pay more and get a decent EV (Like Kia’s EV6), or you can get the best EV, which has the potential to become an AV over time. Tough call.
2) The REGULATORS---SEC coming for Musk? what about all the fires? Can a massive recall send TSLA stocks to $200?
3) The competition is coming.
4) MUSK is a wildman dividing up his base and now siding with the right wing politically and turning off the left side. Very few business play the political game because why?
5) CHINA---lockdowns and other issues are coming for Q2.---I am SHORT and will add to my shorts. COIN will be my short #2.
2.) Crypto Why?These are the last two hyper-bubbles. Both are deflating, but neither has popped. That's about to change. Both assets have > 70% downside.
