Tesla is close to a fraud – Cy Jacobs

36ONE Asset Management founder Cy Jacobs said Tesla’s share price and valuation do not make sense, and their target price is far lower than it is now.

Jacobs told delegates at the 2024 BizNews Conference in Hermanus that “to us, Tesla is close to a fraud”.

“You have earnings halving, and Tesla is getting absolutely killed by BYD in China, which outsells them seven or eight to one, and cashflows look terrible,” he said.

“We value Tesla at between $20 to $30 per share. However, it is still trading at around $170 per share.”

It is not only Jacobs and 36ONE Asset Management who think Tesla is overvalued, as the share has taken a beating over the last few months.

This year, Tesla’s share price plummeted from $248 to $168, showing that many investors have lost trust in the company.

Delving into the finances illustrates why Tesla has fallen out of favour with many global investors.

The car maker’s Q1 2024 results – specifically the production and sale results – showed a continued trend of lower demand in the electric vehicle (EV) industry.

Tesla produced 433,371 cars in Q1 2024, 12.5% less than the previous quarter. It sold only 386,810 cars, 20.2% less than the previous quarter.

This result means that Tesla sold only 89% of all the cars it produced in the quarter, the lowest since Q1 2020 – when the pandemic hit.

News also emerged that Tesla has been cutting back on its vehicle production amidst a challenging environment.

The news induced a selling spree of Tesla stocks as it indicated a possible end to Tesla’s vehicle demand and, therefore, its growth.

In the past few years, Tesla has focused most of its resources on expanding its production capabilities.

Tesla’s vehicle manufacturing capabilities could not keep up with the demand.

In only 3 years since 2019, Tesla achieved remarkable milestones, concluding three gigafactories in China, Germany, and Texas.

From 2019 to 2023, Tesla produced and sold five times more vehicles annually – from around 360,000 to around 1.8 million.

Tesla’s efforts paid off, and the Tesla Model Y was crowned as the best-selling car in 2023, thereby taking the spot of the Toyota Corolla for the first time in 20 years.

However, in recent months, Tesla has been unable to uphold its growth trajectory. From the third quarter of 2023, a slowdown in demand for Tesla vehicles started to emerge.

News of Tesla cutting production was then released. It was the first time weak demand forced Tesla to cut production.

The soft demand continued, as illustrated by Tesla’s vehicles produced and sold.

Considering the lower lagging demand and lower production, it is hardly surprising that Tesla missed its revenue and earnings targets in Q4 2023.

Investors were especially unhappy with Tesla’s revenue result, which was only 3.5% higher than Q4 2022. The weak financial growth put downward pressure on its share price.

Tesla’s struggles have also been exacerbated by increased EV manufacturing in China.

Chinese EV producers have been working hard to capitalise on the EV market and can produce EVs at lower prices and with wider product ranges.

Tesla customers, for instance, have been unhappy with the slow rollout of new models, and the small model range has left consumers with fewer options. 

Slowing EV demand added pressure on the company. However, it was not only Tesla which has been hit by EVs losing their lustre.

Many other vehicle producers have significantly lowered their EV sales estimates in late 2023 and subsequently cut EV production.

These include large players such as Toyota, Volkswagen, and Ford. However, their other product lines helped to bolster their performance.

So, even though Tesla experienced troubles, other car manufacturers saw strong returns in comparison.

Toyota saw 70% growth in its share price over the past year and a 32% increase in the year-to-date.

Honda and Stellantis experienced more than a 50% increase in their share price over the past year.

The table below shows the performance of prominent car companies year-to-date (YTD) and over the last year.

Vehicle manufacturer	YTD	1 Year
Toyota	32%	70%
Stellantis	18%	52%
Honda	27%	53%
BMW	25%	10%
Ford	11%	7%
Mercedes	12%	5%
Volkswagen	18%	0.04%
Tesla	-32%	-13%

Despite Tesla’s fall in share price, it remains comparatively overvalued compared to its global competitors.

Tesla trades at a price-to-earnings (P/E) ratio of 39 times earnings, while its competitors are priced much lower in comparison.

Tesla has historically been overvalued due to its significant growth. However, with slowing demand levels and increased competition, much of its growth has fallen away.

Tesla still has a very high price mark and investors now have to decide whether the current valuation is justified by the anticipated growth.

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Tesla’s Market Story Is About Growth. That’s Now in Question – from Bloomberg’s Esha Day

Shockingly low quarterly sales figures from Tesla Inc. this week are raising a fundamental question for investors: If the days of breakneck growth are over, what are the shares of Elon Musk’s company really worth?

The concerns are valid. The number of cars Tesla sold in the first quarter missed Wall Street’s expectations by such a wide margin that it’s worth wondering how much of the electric vehicle giant’s demand problem is baked into the lofty expectations for its revenue and earnings growth over the next few years.

“There is not a lot of visibility on where Tesla’s next leg of growth will be — whether EVs or its other projects,” said Nicholas Colas, co-founder of DataTrek Research. “If you are going to command a premium multiple you will have to have great earnings visibility or a fantastic story on why those earnings will show up in the future. Tesla has neither at the moment.”

The growth issue around Tesla has become so sensitive, that a report on Friday saying the company was getting rid of its low-cost EV plans — which were considered key to fixing its demand problem — sent the stock tumbling more than 6%.

Musk rushed to refute the story in a post on his social media site, X, which erased roughly half the decline but still left it as the heaviest weight on the S&P 500 for the session.

Then, after the market closed, Musk posted on X that the company would unveil its “robotaxi” on Aug. 8, causing a rally in after-hours trading.

“Tesla needs a $25,000 compact vehicle as a flanker product to compete with the many $25,000 EVs being launched,” said Gary Black, co-founder of Future Fund Advisors. “Doubling down on a robotaxi vehicle at this point would be incredibly risky.”

All of which helps explain why Tesla’s stock has struggled so much this year. Its 34% plunge makes it by far the biggest drag on the Nasdaq 100 Index since the start of January, and the worst performer on the S&P 500 Index.

About 76% of the company’s current valuation is still predicated on its future earnings potential, according to a DataTrek analysis. Over the past year, shares have fallen 11%.

Sales Shock

“We caution Tesla shares could fall much further still should the company not be successful in quickly restoring unit volume and revenue growth,” JPMorgan analyst Ryan Brinkman wrote in a note to clients on Wednesday, pointing out the risk to Tesla’s stock market capitalization if it’s no longer perceived as a hyper-growth company.

Tesla sold about 387,000 cars in the first quarter, while analysts, on average, thought that number would be around 449,000. Obviously, profit estimates for the quarter will now have to be cut, after already dropping by more than half in a year.

It also puts the company on track for a second straight year of declining annual earnings. In fact, analysts on average now expect that it will take until 2026 for Tesla to exceed the level of profitability it posted in 2022.

That, however, does not mean the shares are cheap. At 59 times forward earnings, Tesla’s the most expensive member of the Magnificent 7 group of big tech companies.

High-flier Nvidia trades at a multiple of around 36, and Amazon.com Inc. is at 45. Yet, Tesla has the lowest growth estimates of the three for this year. And its stock is the biggest decliner in the Bloomberg Magnificent 7 Price Return Index in 2024.

Brinkman believes there’s a decent chance that Tesla’s revenue drops materially in the first quarter, “likely causing even the most bullish investors to take a sentiment check.” Analysts on average expect a slight decline of around 0.6%, according to data compiled by Bloomberg.

Despite Wall Street’s seeming surprise over Tesla’s troubles, no one should complain they weren’t warned. Tesla first noted the weakening pace of demand in October last year. But the reaction shows how few people fully grasped the speed of the deceleration.

“Analysts knew that EV growth was waning, but the extent at which it would impact sales was misunderstood on Wall Street last quarter,” Adam Sarhan, founder and CEO of 50 Park Investments, said in an interview.

Potential Rebound

With all of this being said, Tesla shares could rebound in the short term as dip buyers start sniffing around. They closed at $164.90 on Friday after trading as low as $160.51 when the news of the low-cost vehicles first hit.

Chart technicians, who analyze stock moves to spot such reversals in trends, say the shares appear to be finding a near-term bottom. In other words, the most intense part of the selloff may be done — at least for now.

“As long as the stock stays above $150-$160 area, technically, it is trying to trace out a bottom,” 50 Park’s Sarhan said.

But the company will have to show more for the stock price to have a sustained recovery. Investors need to be convinced that Tesla can return to its strong growth, fat margins and highly innovative ways.

Right now, the story is shrinking demand and a shaky outlook, which cuts to the heart of the company’s towering stock market valuation.

“It is challenging to call a bottom at this stage because there is not a true catalyst on the horizon,” said David Mazza, chief strategy officer at Roundhill Investments. Stemming the bleed in the shares will require Tesla to pull a “proverbial rabbit out of the hat,” he said.

“It looks like Musk is trying to do just that with his latest X post on the robotaxi,” Mazza said. “But unless the company shares specific news on shoring up the core EV franchise, the impact may be illusionary.”