After Tesla’s stock tanked in 2022, many investors are now wondering if now might be a good time to scoop up a bargain. To assess the situation, Seneca Financial Solutions’ investment analyst Ben Richards is here with his take on the situation.
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Tesla stock fell by around 70% in 2022.
A common misconception for investors is that if a stock is down 50% it must now be cheap, despite the fact that it can certainly halve again if the valuation is inflated to begin with. Tesla, at a market capitalisation of ~$375b (down from $1 trillion at one point) still has a higher market value than established giants Mastercard and Meta Platforms (formerly Facebook).
Peter Lynch’s investment philosophy would tell us that observing the growing number of Teslas on the roads could be a hint that the stock is worthy of further investigation. But if everyone can observe this trend, maybe it is already factored into the stock price. As Warren Buffett once said: “price is what you pay, value is what you get.”
Technology, technology, technology
In order to justify buying Tesla shares today, one needs to be comfortable paying a premium multiple relative to their competitors. Bulls may argue that TSLA is not just an automobile manufacturer but a tech company. A similar argument was made in the height of market mania in early 2021 when ‘buy now pay later’ players like Afterpay (since acquired by Block) and Zip were being valued as tech companies rather than unsecured consumer lenders. They once traded at as high as 40x sales. The preceding share price performances speak for themselves.
Part of Tesla’s technological push is in the autonomous vehicles space. The data Tesla is generating for autonomous engineering is valuable but widespread autonomous vehicle adoption is further away than most appreciate. Amara’s Law states that “we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”
Autonomous vehicles have well known challenges – both technical and practical. Cathie Wood’s ARK Invest optimistically estimates robotaxis could account for more than 60% of Tesla’s enterprise value in 2026, just 4 short years away.
The man with the Midas touch?
Tesla’s CEO and face of the company, Elon Musk has had a busy twelve months. He bought social media platform Twitter outright, costing a cool $44b. Elsewhere, Musk’s re-usable rocket and satellite internet company SpaceX raised $750m at a $137b valuation in early 2023.
Tesla is admired as a visionary company but Musk’s ego is bad for brand equity. In a fiercely competitive sector, a large portion of Tesla’s equity value is likely attributable to the Tesla brand.
Tesla managed to post an impressive 4% increase in vehicle deliveries in 2022 to 1.31 million. The key consideration for investors is the sustainability of this growth rate. Much of the EV stock valuations still depend on their potential rather than current business performance.
In Germany, Europe’s largest auto market, electric vehicles recently took the majority of new auto sales from ICE for the first time in December 2022 according to German research house KBA. The data also shows the Volkswagen electric ID3 outsold its ICE equivalent car, the Golf, for the first time ever.
Old-school car manufacturers are pivoting their businesses towards EVs successfully. Regardless of the fast pace of EV adoption – everyone can see that the trend is upwards – the key to generating shareholder returns is figuring out how much value any given player will capture in the longer term. And Tesla faces stiff competition from numerous well capitalised, established players.
If not TSLA, then what?
We think the EV thematic is here to stay. However, there are many ways to skin a cat when playing this thematic through companies at different stages of the EV value chain. At Seneca, we think there are opportunities presenting themselves in battery material producers both upstream (mining) and downstream (processing) as well as the ‘picks and shovels’ style businesses allowing these deposits to be defined and mined.