Can Tesla Get Out of the DOGE-House?
Believe it or not, Tesla shares are little changed since 2021. How can the company move forward?
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Let's do something different for this week's Weekly Wins and look at Tesla, a stock with a big win this week, but whose future might be limited unless they make major changes. I've linked to some recent articles by our team, including by our pals at TheStreet.
Tesla TSLA had a big week.
The company announced poor earnings, but shares of their stock soared by 18%. Investors are treating Tesla like a meme stock - it’s not now, nor has it ever traded based on fundamentals.
And, here’s the thing you need to know. This stock has been dead money for the last four years. It has underperformed the S&P 500 by 15 percentage points, caused investors to withstand significant volatility, and the company hasn’t launched a significant innovation since the Model Y in 2019.
I just don’t get why investors, better to call them speculators, are in love with this stock.
Tesla shares have been dead money since 2021
Tesla closed Friday at $285, a price it first hit in 2021. That’s smack dab in the middle of this stock's monster trading range for the last four years.
I’m sorry, investors, you’d have done better and slept better in an index fund. Which, would probably offer exposure to Tesla, anyway. But those of you who are speculators are loving this volatility!
Shares more than doubled to an all-time-high of $488 following the election, when everybody thought that Musk’s proximity to the new administration would reap benefits for the EV manufacturer. Following the inauguration, shares dropped to pre-election levels, losing as much as 48%. A round-trip for investors.
Proximity to Trump hasn’t worked in Tesla’s favor, and I see $300 as historic resistance.
What are investors thinking?
At $300, the stock is wildly overvalued. According S&P CapitalIQ, the PE ratio for the company is an insane 164x. Price to Sales is a little more sane at 9.51x, but remember, Price to Sales tells us how much we are currently paying per each dollar of sales (aka revenue). A normal number is around 2 or 3.
Former CEO of Sun Microsystems, Scott McNealy offered sage wisdom to investors who were upset about losing money in his company's shares following the Dotcom bust. His words are just as relevant to Tesla investors today, given the aforementioned Price to Sales of 9.51x.
He said: “At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends.” He goes on to say how impossible that is, since it would require not paying employees or taxes.
He ends by saying to investors, “What were you thinking?”
That’s where we are today with Tesla. Lot's of risk with uncertain reward.
Look, it’s not a bad company. They’ve done more to advance EVs than any other company or government organization and have been incredible innovators.
I used to describe my own Tesla Model 3 as a fast iPhone on wheels.
But, the company is in worse shape than before the election.
Before the election, headwinds included:
- Strong new competitive offerings from traditional car companies
- Lack of EV charging stations. Range anxiety is real.
- Lack of innovation at Tesla. Model 3 and Y are more than half a decade old, the Cybertruck is a flop, Full Self Driving is still in beta, Robotaxi is more like remotely-driven-taxi, and robots? Are you serious? I’d rather have a scary clown in my house.
- Tesla cars are not well built. Don't agree? Body panels are falling off the Cybertrucks they were glued onto.
- Trust. Nobody trusts Tesla (or Elon) when they give a launch date or price. Robotaxi is years behind Waymo and was driven remotely by a human at its unveiling last October. Cybertruck was supposed to cost under $40k.
- The board of directors is anything but independent.
- AllianceBernstein, in 2019, reported that executive turnover is incredibly high.
Since the election, it’s only gotten worse. In addition to all of the above, there’s also:
- Odometer manipulation scandal
- People are exhausted by Elon
Is Elon Musk an asset or a liability?
Yes, the stock is up this week because Musk said that he’s going to spend more time at Tesla. Investors are excited to have Musk’s leadership back at the yoke.
Should they be?
According to a CNBC poll:
- 52% of Americans have a negative view of Elon Musk, weaker than GM, the auto industry in general, and EVs.
- While 35% of the population is negative on EVs, 47% are negative on Tesla. Similarly, while 33% of Americans view EVs positively, only 27% view Tesla positively. That’s a big negative for the brand.
- Democrats, the company’s traditional purchasers, and a group that is overall very positive on EVs, are significantly negative on Tesla.
- Republicans, while positive on Tesla, are net negative on EVs, making them unlikely purchasers.
So, Musk’s return to the company, while sounding great, will not boost sales of its passenger cars.
How to boost Tesla Sales
You know what would boost sales? Appealing new products that are an advancement over existing ones, look great, and offered at the right price point. They’d have to be better than the enormous number of new competitors in the market, and that includes improvements in battery tech, where the Chinese have just announced a huge advantage over Tesla.
That’s an even bigger job now. Many potential consumers of the announced low-priced Tesla might just buy a higher-end used Tesla instead. There's a glut of them on the market. Or wait a year for the Bezos-backed Slate truck that will cost around $20,000 and offer many options for customization. Teslas are pretty generic, with limited paint selections and options.
Who’s going to build those new products? Remember, the company is known for having high executive turnover. Some turnover is beneficial, but not at the expense of losing innovators. And why would a top quality executive want to work for such a volatile leader and company?
This may explain why Tesla hasn’t had a winner since 2019’s Model Y.
TheStreet reported that Ross Gerber, a longtime Tesla shareholder, believes Tesla would be better off if Elon Musk simply stepped away. His polarizing tweets are killing the brand.
I agree. But it’s not that easy. Elon Musk is synonymous with Tesla. He is also the company’s largest shareholder, owning 12% of the company, according to S&P CapitalIQ. People who are disillusioned with Musk are unlikely to want to further enrich him.
Musk needs to do more than just step down. He needs to liquidate his holdings for the good of the company. Yes, that would put pressure on the shares, but Musk's 410 million shares could be absorbed within one week's worth of current trading volume.
I'd be a buyer!
Tesla desperately needs a win. They need to innovate. Fart sounds and tweets won’t do it. The company needs people who can catch a rocket, like the engineers at Musk’s venture, SpaceX.
Without that win, Tesla remains horribly overvalued. I wouldn't recommend shorting a stock like this, unless you're a trader, but in a recession, shares could easily fall back to $150 or even $100. At those levels, based on current fundamentals, the PE ratio would still be frothy but the Price to Sales would be more in-line with the mature company that Tesla could become.
SUMMARY
While speculators are giddy about the DOGE leader darting back to his roots, Tesla’s customers are simply exhausted by Elon.
Additionally, Tesla has not been kind to shareholders, who would’ve been better off in an index fund. I don’t see that changing without new leadership. Risk is that shares could fall to as low as $100.
Maybe it’s time for Elon Musk to give another executive a chance to shine.
At the time of publication, Meshnick owned no shares of Tesla.
