The most overused analogy in financial reporting is the Wile E Coyote, to describe any plunge that comes only after a realisation. This is odd, since most market trends are shaped more like Homer Jumps The Gorge:
Take, for example, Tesla.
To recap: after a period of infantile delusion, Elon Musk’s accidental bid for Twitter coincided with fiscal gravity reasserting itself and the metaphorical skateboard went over the gorge anyway. For a time, investors overlooked Tesla’s weak second-quarter deliveries and bought into Musk’s misplaced confidence that he could style everything out. Then in October, a miss on Tesla third-quarter deliveries brought home the inevitability that the Muskoverse was going to hit the cliff. Thereon, only pain.
A fourth-quarter deliveries update this week was, to follow this plot arc, when the rescue ambulance crashed into a tree. Tesla’s total deliveries of 405,278 in the December quarter missed the consensus forecast and pulled the stock to its lowest since November 2020.
There’s a lot written already about Tesla being at the nexus of the derating of growth megacaps and the Cult of Musk’s pivot towards doomsday. None of it has been needed to explain this week’s price decline, which can be pinned on just one fact: Tesla sells fewer cars than it makes. Morgan Stanley estimates that Tesla’s channel inventory quadrupled in a year as production exceeded deliveries by nearly 56,000 units.
Reasons for inventory bloat are likely complicated and intertwined — probably involving some combination of weaker total autos demand, fewer supply chain problems, timing of rejigged US tax breaks, Chinese lockdown effects and anti-Musk sentiment in the west. Competition has also been strengthening against Tesla’s stale fleet: the mass-market Model 3 is almost six years old and the S and X were last updated in early 2021, which feeds into a deflating used-car market that cannibalises new sales. Chart and table from CarGurus:
Another question is how long Tesla can rely on Musk’s trick of creating demand for products that exist by showing off ones that don’t. JPMorgan notes that sales required “atypically high discounting” last quarter, including “a $7,500 discount in the US late in Q4 more reminiscent of traditional automakers trading at substantially lower earnings multiples, and multiple price cuts in China throughout the quarter.” Look past the CEO’s carnival barking and there’s a growing impression that Tesla is becoming rather ordinary.
Tesla’s third-quarter letter targeted manufacturing capacity of more than 1.9mn units in 2023, up 45 per cent from 2022, as its Austin and Berlin factories get up to speed. Even if new models and fleet updates are delivered to schedule — a very big if — where is the incremental demand coming from? And how severe might the market’s reaction be to the next inventory build?
FT Alphaville’s extensive back catalogue chronicles the broken promises, questionable accounting, mysterious operational efficiencies, atypical management style, communications leitmotifs and memeworthiness that helped Tesla’s market cap exceed $1tn. We’ve not said much about its slip back to a $340bn market cap because the reasons are not that interesting. It’s just gravity. An expensive stock has become slightly less expensive.
To illustrate, here’s a risk-reward chart from Tesla superfan Adam Jonas of Morgan Stanley and his underlying assumptions, Though Tesla continues to promise 50 per cent CAGR in the medium term after doing 39 per cent in 2022, Jonas frames his the base case around 25 per cent CAGR to 2030:
Now that Tesla has lost 70 per cent of its value in 12 months, one might think its valuation is approaching those of ordinary automakers. It’s not. All that’s happened is that the multiple given to 2030 earnings has compressed a bit, but Musk’s powers of deflection are weaker and all the stuff about accounts and operations highlighted above has not gone away. Exceptional numbers in a harsher market will raise more questions about how they were achieved. And if the numbers keep looking unexceptional, it could yet be a long way down.
Heidegger and Bart Simpson do crypto — FTAV