By Adam O'Dell, Banyan Hill Publishing, 2024-07-25
Back in 2020, EV automaker Tesla (Nasdaq: TSLA) and its CEO Elon Musk were on top of the world.
TSLA's share prices were surging higher and higher. Musk's tweets were making daily headlines. And the company's Model 3 was quickly becoming one of the hottest cars in America.
But even at TSLA's peak, Musk knew exactly how fragile his company's future was.
In a now-famous interview, Musk explained that investors were willing to pay such high prices for TSLA shares because they expected future profits would make it worthwhile.
“If, at any point, they conclude that's not going to happen, our stock will immediately get crushed like a soufflé under a sledgehammer!” Musk ominously went on to say.
Well, it seems like the day of the sledgehammer may have finally arrived.
In yesterday's earnings report, the mega-cap market darling announced that automotive revenue declined by 7% year-over-year. Earnings were down by 42%!
And diving deeper into the report only yields more bad news:
- Annual rate of sales growth fell from a peak of 73% in Q2 2022 to 10%.
- Annual rate of earnings growth fell from 678% in Q1 2022 to 15%.
- Gross profit margin (as a percentage) fell from 32% to 22%.
- Operating margins have been slashed by more than half, from 17% in Q1 '23 to 7.8% currently.
- Current Earnings per share (EPS) is 54% lower than the same quarter a year ago.
This would be extremely difficult news for any company to deal with…
But after last year's massive run-up in “Magnificent Seven” stocks, TSLA's valuation is stratospheric. The company is currently selling at an eye-watering 69.2 P/E ratio.
That means today's TSLA investors are paying an extremely steep premium for shares of a business that's now in rapid decline.
You can see that decline reflected in the company's Green Zone Power Rating too:
(Click here for Green Zone Power Rating)
A Reckoning Long Overdue for Tesla
Longtime readers will know I've never been shy about sharing my thoughts on TSLA and Elon Musk.
I give Elon credit for doing something no one else had done before him.
He finally made electric cars cool.
But it was always obvious to me that the logistical difficulties of the EV business would eventually catch up with Musk's big dreams and bigger celebrity appeal.
I'll be the first to admit — it was frustrating to watch TSLA maintain its sky-high share prices when I knew that a disappointment like the one we received yesterday was … inevitable.
But in the immortal words of John Maynard Keynes, “Markets can remain irrational longer than you can remain solvent.”
Indeed, it seems like TSLA has been caught up in every major investing “zeitgeist” over the last few years.
From solar roofs to self-driving cars to accepting bitcoin as payment, Musk did a masterful job of keeping his company's name in the headlines (even though few of these projects ever make it to market).
But nothing lasts forever.
Historical stock market studies have found that fortunes can shift rapidly. The best-performing stocks of the last decade almost never become the best-performing stocks of this decade.
That's because the market is always evolving and adapting to new global “themes,” something the chart below from Visual Capitalist captures perfectly:
This really helps put TSLA into a “big picture” context.
Investors believed EV investing would be one of the major themes for the market this decade, so they were willing to pay a premium to invest in a market leader.
But now that Tesla's shortcomings are becoming clearer and clearer, we can expect to see some sledgehammer-and- soufflé action in the near future…
To good profits,
Chief Investment Strategist, Money & Markets
