Investing is typically viewed as a long-term endeavor, although certain individual days can bring significant excitement.
Recently, Tesla has been the focus of attention with its quarterly earnings report expected on October 23, which will address the financial performance for the period ending in September. Shareholders are keen to observe any changes in revenue, profit margins, and cash flow to assess the company’s financial health.
The anticipation follows Tesla’s “We, Robot” event earlier this month, which did not meet expectations and negatively impacted the stock. The stock has declined by 46% from its all-time high in 2021, coinciding with slowing revenue growth for the electric vehicle and renewable energy company. Some suggest this may represent a buying opportunity for long-term investors.
Tesla has been experiencing a deceleration in the growth of its electric vehicle deliveries in recent quarters. Deliveries reached 463,000 in the third quarter, an increase from 435,000 in the same quarter the previous year, but still below the peak quarterly figure of 485,000 recorded last December. The challenge lies in expanding at such a large scale, particularly due to the high cost of its vehicles. Furthermore, the introduction of new models has been limited, with the Cybertruck being positioned as a niche, high-priced product.
Tesla has reduced the average selling price of its vehicles substantially to maintain sales momentum. This price reduction is evident on the company’s website and in the broader marketplace, with used Tesla vehicle prices dropping from over $50,000 in early 2023 to an average of $32,000. The decline in selling prices has put pressure on Tesla’s gross margins, which were at 18% last quarter compared to 28% at the start of 2022. Similarly, the operating margin stood at 8.73% last quarter.
These shrinking margins have reversed Tesla’s free cash flow trajectory, which was over $7.5 billion less than two years ago. Over the last 12 months, it has decreased to $1.7 billion and turned negative in the first half of 2024. The company risks burning through significant cash if this trend continues.
At its “We, Robot” event on October 10, Tesla shifted focus from traditional automotive manufacturing to robotics and autonomous vehicles. The company is investing in a project named Cybercab, designed as a driverless taxi, and is developing a humanoid robot called Optimus for various tasks. Tesla is also building AI infrastructure with its Dojo computer. These technological ventures have taken precedence over vehicle updates.
However, challenges persist. With car deliveries lacking significant growth, Tesla’s ability to generate free cash flow is under threat. This free cash flow is critical for funding investments in AI, robotics, and autonomous vehicle technology. Additionally, these projects are far from being commercially viable. While the best-case scenario envisions profitability within a few years, it is more likely a decade-long timeline, despite CEO Elon Musk’s longstanding optimistic predictions of imminent self-driving cars. Relying solely on these optimistic timelines could be risky.
If Tesla commits all resources to these advanced technologies and their market entry is delayed beyond investor expectations, the company’s financial position could further deteriorate. As the EV division shows no readiness to progress further, particularly after displaying weak delivery figures in the third quarter, this remains a concern.
Ultimately, it is important to rely on the financial data instead of speculative narratives. Tesla currently has a market capitalization of approximately $700 billion, while generating $1.7 billion in free cash flow and $7.2 billion in operating income over the past 12 months. This translates to valuations of 400 times its trailing free cash flow and 96 times its trailing operating income, figures considerably higher than typical growth stocks, which often trade at 40 to 50 times earnings. Tesla’s current valuation seems excessively high, especially considering its recent underperformance in vehicle deliveries.
Therefore, there appears to be little basis for purchasing Tesla stock prior to the Q3 earnings report scheduled for release on Wednesday.
