Tesla’s stock has been one of the longest running battlegrounds for investors over the last decade. Believers in the stock and CEO Elon Musk have seen their faith vindicated over much of that time, though there have been periods, like 2022, where the bears who doubt the company’s valuation or criticize Musk’s management style have held sway.
Where does the bull vs. bear debate stand in 2023? Here’s a break down of both sides of the case, based on a recent Bull vs. Bear debate on Tesla (NASDAQ:TSLA) hosted by Investing.com on January 19th, 2023, as well as investment bank analysts’ response to Tesla’s Q4 2022 earnings release on January 25th, 2023.
The Bull Case – EV leadership and battery technology dominance
Ross Gerber, the Co-Founder, President, and CEO of Gerber Kawasaki Wealth and Investment Management, argued on the Investing.com Bull vs. Bear debate that the Tesla bull case “is more intact than it’s ever been.” He cited Tesla’s cash on the balance sheets, two new gigafactories ramping, and “total dominance” in battery technology and charging.
“Tesla is the leader in EV sales globally, with over 1.3 million in sales and growing to probably over 2M in sales this year,” argues Gerber.
Gerber also viewed Tesla’s recent price cuts on some of its models – a move that many argue reflects increased competition and problems with affordability, as consumers around the world struggle with the highest inflation in decades – as a positive: “(They are) bringing the prices back down to a range where a whole new level of consumers can afford the car, we’ve seen demand skyrocket over the last couple days and week,” he adds, clarifying that recent data shows inventory has dropped dramatically since the price cuts.
In addition, Gerber also said that the adoption of EVs is growing dramatically, and with the U.S. still behind other markets, he sees so much upside in the market and industry.
One important component of Gerber’s belief in the company is its full self driving capability, which he was stunned to find his counterpart had not tried out.
The Bear Case – Decreasing earnings and limited growth
Gordon Johnson, CEO and founder of GLJ Research, argued that the price cuts was hardly a positive sign.
“If you look at their profit per car in Q3, it was around $12,797. They just cut prices by $7,250, so the new implied profit per car on these cuts is $5547,” Johnson. “That’s a 56.7% hit to their margin on these price cuts.”
Johnson argues that for Tesla to get back to profit/breakeven, it will need to grow unit sales by 167.2% year-over-year in 2023. “What that also means is that their roughly 26% auto gross profit would drop to about 12.5%,” he adds, going on to explain that in 2023, Tesla is “going to do around $2.18,” referring to Tesla’s EPS, with the current consensus estimate being $4.20.
He also cited Tesla’s website showing no change in lead times for an order as a sign the price cuts were not actually driving more demand.
All this translates to a bottom line in Johnson’s model of about $2 earnings per share, which is well below analyst expectations and could take the stock much lower. Johnson emphasized that Tesla “is just a car company. This is not a growth company anymore.”
Johnson also said he would not be willing to try the full self driving mode, hinting at the safety concerns that have been raised about the new technology from Tesla.
Tesla Q4 2022 Earnings
Tesla stock gained over 8% on the day after their earnings report, as the electric vehicle maker insisted that there’s no problem with demand for its cars, and forecast another year of solid – if slightly slower – growth.
Tesla reported underlying earnings per share of $1.19 in the fourth quarter, a little ahead of the $1.15 consensus, which had been revised down sharply at the end of last year as the company struggled with production and logistics disruptions at its plant in Shanghai. Such problems were partly responsible for the company’s revenue falling slightly short of market estimates at only $24.32 billion.
Elon Musk stated on an analyst call after the earnings release that the price cuts announced earlier this month have had a clear impact on demand, which he said is now running at double Tesla’s current production capacity.
Part of the price cuts benefit was in allowing some of Tesla’s models to qualify for federal subsidies introduced by the Biden administration in 2022. Lower prices increase the pressure on Tesla’s operating margins, which fell to 16% in the fourth quarter but Musk nonetheless forecast that the operating margin in its core auto sales business would remain over 20% this year, well above industry averages.
One negative takeaway from the conference call was Musk’s car forecast for the current year, which at 1.8 million cars was below analysts’ forecasts of 1.9M and also represents a clear shortfall versus its target of 50% annual growth. It would be only 31-37% above 2022, depending on whether Musk meant production or delivery (he did not specify).
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How Bears and Bulls Reacted – “Tesla’s Super Bowl”
As one analyst put it, Tesla’s fourth-quarter earnings report had something for bulls and bears. However, based on the positive price movement on Thursday, bulls have been happier with the results. At least two Wall Street analysts raised their price target following the report and no price target cuts have been reported yet.
Wedbush lifted its price target to $200 from $175, while reiterating an Outperform rating. It said the earnings call was “Tesla’s Super Bowl”, with Musk & Co. delivering in “epic fashion with demand that is currently 2x production coming out of the gates in 2023 and laying out a 1.8 million delivery bogey for the year which was exactly what the bulls wanted to hear and the bears (for now) will go back into hibernation mode.”
Wolfe Research also raised its price target on the Outperform-rated stock – to $185 from $160 – saying growth is re-accelerating and advantages versus peers appear to be widening.
In the bear camp, Bernstein analysts highlighted that auto gross margins were much worse than anticipated and that the price cuts would still weigh on the company. They cited 24.3% margins excluding electric vehicle credits and 23.1% also excluding a one-time full self driving revenue recognition. This versus the consensus of 26.4%.
“Most notably, these margins were before the real price cuts kicked in earlier this month,” the analysts added. “With ~10%+ incremental price reduction year to date, auto gross margins ex-credits could certainly be sub-20% for some quarters in 2023 (given the price cuts point to a $5000+ reduction in gross profit dollars sequentially).”
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