I'm pessimistic about Tesla (Nasdaq: Tesla), and I can't help but think that Elon Musk's announcement regarding Detecting a robotaxi On August 8 it is something of a distraction. So why is Musk distracting us? Well, car sales are slowing, margins are falling, and Tesla's dominance in the EV sector is ending. In addition, the stock's valuation is high. That's why I'm bearish on TSLA stock, but I don't expect it to move much until we know what Musk has in store for us on August 8.
Tesla's performance is disappointing
In the first quarter, Tesla reported a 9% decline in quarterly revenue — the largest year-over-year decline since 2012 — and a 48% decline in adjusted earnings. The company's adjusted earnings per share (EPS). 45 cents versus 49 cents expected. Revenues for the quarter also decreased to $21.3 billion, less than the $22.2 billion that the market expected.
Revenues decreased year-on-year and sequentially. Meanwhile, net income fell 55% to $1.13 billion from $2.51 billion last year. On an unadjusted basis, net income per share fell from 73 cents a year ago to 34 cents in the first quarter of 2024. Moreover, in an increasingly competitive market, Tesla's price cuts have negatively impacted margins with no clear end in sight.
However, Musk also cited unforeseen challenges as a reason for the company's poor performance. “We have navigated many unexpected challenges as well as the on-ramp for the updated Model 3 in Fremont. As we have all seen, the global adoption rate of electric vehicles is under pressure, and many other on-demand manufacturers are pulling back from electric vehicles and seeking hybrids instead of “We believe this is not the right strategy, and that electric vehicles will eventually dominate the market,” Musk said on the first-quarter earnings call.
Am I underestimating Tesla's AI capabilities?
In Q1, Tesla's free cash flow has become negative. The Austin-based company reported a deficit of $2.53 billion, which represents a significant change from a year ago when Tesla had free cash flow of $441 million. In the fourth quarter of 2023, Tesla reported free cash flow of $2.06 billion. Tesla explained that the negative cash flow was due to a $2.7 billion increase in inventory and $1 billion in capital expenditures on AI infrastructure.
AI is certainly the investing buzzword at this moment in time, and I don't think it's been overused. However, some analysts argue that investors should not evaluate Tesla as a car company but as a technology company at the forefront of artificial intelligence.
I'm a bit skeptical about this, although I appreciate that Tesla has AI capabilities in areas like manufacturing, the Tesla Bot, and energy trading. But so far, I'm not yet convinced that these are parts of the business with revenue-generating potential that is even remotely comparable to car production.
Of course, AI-powered Robotaxi could change my mind. The question is whether Tesla has actually managed to achieve a quantum leap in the field of autonomous technology. This would truly put Tesla in the driving seat and establish its dominance in the self-driving car sector.
The growth of the Robotaxi sector would also open up another income-generating sector, which looks very attractive. Self-driving cars require a lot of computational power, but that power will only be used when the car is active. This means that these wonderful computers will only be used a fraction of the time.
Similar to Amazon (Nasdaq: AMZN) Web Services, Tesla could sell this excess capacity and create a new and potentially significant revenue stream. “It seems counterintuitive to say, well, if we have millions and then tens of millions of vehicles where the computers are idle most of the time, we might as well make them do something useful.” Musk said on the first-quarter results call, adding that Tesla could have 100 gigawatts of “useful computing.”
Tesla's valuation and Musk's promises
Musk has a habit of overpromising and underdelivering. That's why I remain pessimistic on Tesla. I've yet to see evidence that Tesla is about to abandon a fully self-driving vehicle, which just happens to have spare compute capacity that can be used and sold as part of some Tesla cloud.
This wouldn't be a problem if Tesla's valuation was in line with its peers. However, Tesla currently trades at about 70 times forward earnings. Furthermore, analysts are clearly not convinced that growth will rebound in the medium term, with the P/E ratio standing at 5.75 times.
For now, the promise of a self-driving vehicle appears to be keeping the stock price high despite the lack of concrete information. Hence, all eyes are on August 8th. I think the stock may fluctuate until then.
Is Tesla stock a buy, according to analysts?
On TipRanks, Tesla comes in at a Hold based on nine Buy, 15 Hold, and nine Sell ratings assigned by analysts in the past three months. the Average Tesla stock price target It is $174.60, which means a downside probability of 6.4%.
The bottom line on Tesla shares
Personally, I'm skeptical about whether Tesla has made real progress in the field of self-driving cars. However, I accept that robotaxis and fully autonomous vehicles have huge potential. Not only is this potential down the road, but also, as Musk discussed, the ability to sell unused computing power to the rest of the market. However, at 70x forward earnings, I simply can't put my money behind Tesla.
