Interactive Investor

Tesla to speed up ‘affordable’ models amid profits slump

After a run of disappointing news, Elon Musk’s electric vehicle business needed a shot in the arm. While worries persist, the shares rallied after these first-quarter results.

24th April 2024 13:37

by Graeme Evans from interactive investor

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Tesla factory in Germany Getty

Tesla inspired a fightback for its heavily sold shares today after it offset weaker first-quarter results with a pledge to accelerate the launch of more affordable models.

Last night’s figures, which according to Morgan Stanley had something for bulls as well as bears, positioned Tesla Inc (NASDAQ:TSLA) for a double-digit percentage rebound at Wall Street’s opening bell.

The shares had fallen 43% so far this year, cutting the electric car maker’s valuation to $450 billion amid concerns about slower electric vehicle (EV) demand and intense China competition.

In late 2021, Tesla’s $1.2 trillion market capitalisation was about the same as the next largest 12 global auto companies. The gap to second place Toyota Motor Corp ADR (NYSE:TM) is now down to $83 billion, offering a potentially cautionary tale for followers of today’s AI and semiconductor boom.

Deutsche Bank pointed out yesterday: “Three years ago EVs, and Tesla in particular, were expected to take over the world.

“While we’ve been very bullish about AI’s ability to change the world in the future, it’s almost impossible to understand how to value the companies that are currently laying the AI pipes and infrastructure.”

Tesla’s financials for the opening quarter of 2024 included the first drop in revenues since 2020, with core automotive sales down by 12.9% to below Wall Street forecasts at $17.4 billion.

But other metrics were more encouraging, particularly the automotive gross margin of 16.4% that came in well ahead of the 15.1% estimate of analysts.

Operating income fell to $1.2 billion, impacted by factors ranging from a reduced vehicle average selling price to an increase in operating expenses due to AI, cell advancements and other research projects.

Morgan Stanley points out that Tesla’s profitability is substantially lower than that of internal combustion makers such as General Motors Co (NYSE:GM), Ford Motor Co (NYSE:F), Renault SA (EURONEXT:RNO). That’s even after the benefits of monetising regulatory credits, downstream retail operations and high margin software and services.

The bank, which continues to have an “overweight” recommendation and big upside in its price target to $310, said: “Q1 had something for everyone. Results were not as bad as many feared, but questions remain regarding near-term growth and profitability.”

UBS said that Tesla had taken the ultimate bear case off the table by updating its future vehicle line-up with a launch date earlier than the previous plan for the second half of 2025.

Tesla is doing so by utilising both its current and next generation platforms so that it can grow its production volumes in a more efficient manner in “uncertain times”.

The company said this will help it fully utilise its current expected maximum capacity of close to three million vehicles, enabling more than 50% growth over 2023 production before investing in new manufacturing lines.

UBS said its growth concerns over the coming years had prompted it to lower its valuation multiple from 50 times forward earnings to 45, resulting in a lower price target of $147.

It said: “We expect the focus will shift back to demand. While we see improvement from Q1 levels, we see limited growth for the current line-up and lack of clarity on what these new vehicles could bring.”

Saxo’s head of equity strategy Peter Garnry added: “Tesla’s results underscore that we cannot talk about the Magnificent Seven any longer, but rather the 6-Pack (NVIDIA Corp (NASDAQ:NVDA), Microsoft Corp (NASDAQ:MSFT), Alphabet Inc Class A (NASDAQ:GOOGL), Meta Platforms Inc Class A (NASDAQ:META), Apple Inc (NASDAQ:AAPL), and Inc (NASDAQ:AMZN)).

“The biggest outstanding question is whether there is any meaningful moat in EVs. Maybe James Dyson was right in 2019 when he ditched the EV market saying they’re simply too easy to make. If there is no moat, then Tesla’s valuation will be difficult to defend.”

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