Dan Brocklebank, UK director of Orbis Investments, said Tesla’s tumbling share price was due to “gravity”, as the high liquidity dynamics that allowed its valuation to rocket have now faltered.
Expensive stock
According to Brocklebank, the “core fundamental challenge for Tesla” was sustaining the rapid growth necessary to justify the firm’s share price, which is being hampered by the growth of products from competitors.
He said: “At the end of the day, valuation always matters. A year ago, the world was awash with liquidity and in the throes of an epic ‘everything bubble’, in which Tesla arguably sat at the centre. Today, the fundamental laws of financial gravity are re-asserting themselves.”
Tesla’s share price over the past 12 months ($)
James Warner, equity analyst at Mirabaud Equity Research, echoed Brocklebank’s argument, pointing out that Tesla had been trading on a forward PE of about 200 in Q4 2021, leading it to be treated “particularly harshly by the market this year, as the era of cheap money has come to an end”.
He said Tesla’s valuation “has been detached from fundamentals for at least five years, maybe more”, noting the firm is still twice as large as Toyota, despite the latter producing ten million cars compared to Tesla’s 1.3 million.
Orbis’ Brocklebank added the electric car giant’s peak $1trn valuation peak was disjointed from what it actually contributed to the sector’s productivity.
He said: “[Tesla is]easily valued at more than the rest of the auto industry combined, despite producing only a small fraction of the industry’s products”.
Even now the valuation has fallen 70% from its peak, Teslahas not fallen to a reasonable enough level for Brocklebank, who argued “it is still not possible in our view to make a case that Tesla is cheap”.
One major development for Tesla has not been events in the company itself, but the purchase of Twitter by CEO Elon Musk.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, argued that Twitter had become a “major distraction” for Musk.
She said: “Stepping down as CEO of the social media platform would be a sensible step for Mr Musk and should help stabilise Tesla’s share price, but so far there appears to be no-one waiting in the wings to take over.”
Mamta Valechha, equity research analyst at Quilter Cheviot, agreed, arguing Musk’s purchase of Twitter has seen “negative sentiment creep into Tesla” as it becomes impossible to separate the two firms.
Mirabaud’s Warner also highlighted Musk’s purchase of Twitter, noting he had used $13bn of debt for the deal.
He explained: “Things have become very messy for the banks holding this debt as the Tesla stock collateral has nose-dived in value.”
Musk has also sold off nearly $23bn in Tesla shares this year, which may have been to help finance the purchase and running of Twitter.
Warner added the volumes of trading for Tesla have also been “somewhat alarming,” noting it traded 95% of its float in the last 15 days.
Nevertheless, Valechha said that not all of Tesla’s problems could be attributed to this, as some of the drop in stock price can be attributed to the wider macroeconomic picture, with interest rate rises and inflation both being detrimental to growth stocks.
Additionally, the company has faced some specific issues with production slowdowns.
Demand
Felix Wintle, manager of the VT Tyndall North American fund, argued the decline had come from “real concern over demand for the cars”.
He said: “Recent delivery numbers were weaker than expected and as competition intensifies that situation is likely to get worse.”
Wintle explained that one reason the stock had soared in the last couple of years was excitement around the firm’s battery and self-driving technology, however “neither of these things has made any impact on the business and 90% of revenue is still from the sale of cars”.
The manager said he expected “further weakness as investors continue to reprice what this company actually is, versus what the hopes and dreams were over the last few years”.
He concluded: “Tesla stock should be avoided and has a lot lower to go in my opinion.”
Warner noted that competition “is heating up within the electric vehicle space,” and Tesla’s first mover advantage is slowly being eroded by incumbent original equipment manufacturers and Chinese EV players.
He argued that established brands are already “far ahead on build quality and reliability”, leaving Tesla’s one remaining advantage as its charging network.
This was already starting to show, as Tesla is eclipsed by brands with far more variety and product range, leading Q4 2022 production to far outstrip deliveries by more than 8%.
Streeter also emphasised growing competition in China, the world’s largest car market, where it already has some “formidable” rivals, such as BYD.
However, Valechha was more positive about the long-term outlook for the firm, while still acknowledging the short-term volatility.
She argued that Tesla “still has many demand levers to pull”, such as an increase in vehicle leasing and additional supercharging initiatives, as well as the growth of new products including the Cybertruck and Tesla Semi.
Additionally, the Inflation Reduction Act in the US, which passed last year, has introduced a $7,500 tax credit for electric vehicles, while costs continue to come down for the firm through “leveraging its cost leadership in manufacturing and vertical integration”.
Valechha concluded: “Given Tesla’s lack of debt and self-funding, we see it as relative low risk than other EV players and legacy equipment manufacturers.”