OK, 2022 Was a Disaster for Tesla - What Next?

Op-Ed Piece in the Financial Times by Drew Dickson

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Despite Tesla surrendering a good portion of its frothy gains in 2022, it is off to a poor start already in the new year. Its market capitalisation has now fallen by nearly $900bn since November 2021 — equivalent to losing nearly half the FTSE 100.

Yet there are still many who believe that Tesla’s shares will recover to new highs (as it always seemed to before) — and they don’t get these ideas out of thin air.

Some of this conviction is built upon a quasi-religious foundation that Tesla is the new Apple. In this worldview, the traditional vendors are facing impending disaster, as Nokia and BlackBerry did after the introduction of the iPhone.

The purported analogy between handsets and automobiles is self-serving and wrong. Yet still, and even with the stock down from $400 a year ago to $110 today, some (but not all) of the Tesla faithful are clinging on to a view that many incumbent automakers are on the verge of bankruptcy.

The Tesla community likes to call these competitors “legacy” vendors as if they won’t survive, with misinformed statements about how debt-laden they all are.

When the secured debt from their financing divisions is excluded (as is done by the rating agencies, and presented by the automakers themselves) it reveals that many of Tesla’s competitors making the transition from internal combustion engines (ICE) to electric vehicles (EVs), are awash with net cash.

From a valuation perspective, when we add net debt to (or subtract net cash from) stock market equity values, we get the firm’s “enterprise value”. On this metric, Tesla still has a similar enterprise value to many of these automakers combined even after falling so sharply in 2022, despite being utterly unjustified by current fundamentals.

But this is not a game about yesterday, it is a game about tomorrow. And there is no doubting that Tesla has made more progress in EV than anyone over the last several years.

Even after some late-quarter discounting last month and slight miss on delivery expectations in the fourth quarter, the company still grew unit deliveries by over 40 per cent year-on-year. And we know the Cybertruck is (probably) going to be introduced later this year.

Wall Street consensus expectations are for nearly 40 percent revenue growth at Tesla into 2023; and some $TSLA fans even expect 50 percent growth, and for many more years. This kind of growth theoretically could justify a premium valuation.

So then why the huge move lower in 2022?

Some believe the sell-off at Tesla is almost entirely driven by Elon Musk’s takeover of Twitter, the distraction of running it, and the potential alienation of some traditional Tesla buyers on the left. Musk’s sale of almost $23bn worth of Tesla shares to finance the Twitter acquisition certainly hasn’t helped either.

But when we take a step back and compare Tesla to other meme-esque EV stocks, something else is revealed. Sure, Tesla is now down almost 70 per cent since the end of 2021. But Rivian, Lucid, Nio, XPeng and Nikola are all down as much or even more. They are not down because Elon Musk bought Twitter, and neither is Tesla.

In my view it’s mostly been about a changing narrative. The air is simply coming out of all the bubbly EV plays; just as it has for the stay-at-home stocks like Peleton, Zoom and Carvana; just as it has for meme stocks like AMC and Gamestop; just as it has for SPACS; just as it has for NFTs of digital rocks; and just as it has for bitcoin, dogecoin, and other crypto fairy tales.

This paradigm shift began long before Elon Musk became the CEO at Twitter. The speculative fervour of 2019-2021 is simply correcting itself.

What makes Tesla far more interesting than the other deflating bubbles is that in its particular case, fundamentals were exceptional over the past few years.

Consensus sellside analyst estimates back in early 2020 projected that the company’s earnings-per-share three years out (in 2023) would be about $1.80. At that point the stock was changing hands for just $28 a share. So, basically, at an out-year P/E of about 16 times.

Today, out-year (2026) EPS expectations are $8.82, and the stock is back down to $110. So, reframing this, since early 2020, the company has seen a fivefold increase in the fundamental expectations of the firm, and nearly a fourfold increase in the share price.

Sure, yes, when the stock flirted with $400 last year, thing were a bit nutty — but is it that crazy today? And on a P/E of 17 times 2024 earnings, Tesla is as optically “cheap” as it’s ever been, especially when you see that sellside analysts anticipate 25 per cent EPS growth.

Unless, of course, earnings growth falls short of expectations. And this the BIG if.

If Tesla can keep up its profitability, and grow the topline as the bulls expect, then the bears will be wrong, and this current level will have proven a time to buy. If however Tesla starts to lose share faster than many have modelled, and we see any threats to their profitability (either from Chinese, US or European competition, new model requirements, or mass market price points) then it may have proven not to be the time to buy.

That’s it. That’s the framework. If you hate $TSLA, then model those factors out and short it; and if you end up undershooting, cover it. If you however love $TSLA, then model it out and buy it; and if you end up overshooting, then sell it.

Now, some of you may have views about the sustainability of Tesla’s regulatory export credits, the value of their energy business, the prospects for an insurance business, the likelihood of reaching Level 4 or even Level 5 autonomous driving technology (and before anyone else does), or even the Teslabot. Some of these may be worth something, or all of them may be worth nothing. This certainly adds a wild card to the valuation of Tesla. But the main driver will probably remain the automotive business.

In the meantime, every stock out there — including Tesla —is a sell at some price, and everything is a buy at some price too. That isn’t Drew Dickson speaking, it’s Ben Graham.

So here I am simply trying to lay out a way to de-bias ourselves a bit. The key here, whether we are buying, or selling, or covering or shorting, is to not let emotion rule us; and let the fundamentals do the talking.

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