Earnings Update: A Crossroads for Tesla?

A lot of eyes have been on Elon Musk’s purchase of Twitter this week. He can be quite the showman.

On Thursday he showed up at Twitter HQ with a large piece of bathroom plumbing…

But while speculation on this goes on, another of his battered companies was reporting their earnings last week.

Let’s take a look at how Tesla did…

Near Record Profits

From an earnings perspective, there was some news to be excited about. Tesla posted a near record quarterly profit of $3.3 billion (just shy of its $3.32 billion posted in the first quarter of this year and way ahead of $1.62 billion it earned a year ago).

On a per share basis they reported $1.05 in adjusted EPS which beat the market’s expectations of $0.99 per share.

From a revenue perspective, they came up a little short. Sales came in at $21.45 billion, up 55% from year ago numbers but slightly below expectations of $21.96 billion. A near miss, but a miss just the same.

All in all it wasn’t a bad report given that Tesla’s been tacking into some pretty stiff headwinds.

Namely unit deliveries, which appear “iffy” at the moment. (Tesla delivered around 936,000 cars in 2021 making this year’s target — per their “50% annual increase” target — somewhere around 1.4 million units.)

While Capt. Musk insists he doesn’t see the threat of recession making waves where demand for their product is concerned, thanks to supply chain bottlenecks parts have become more expensive and more difficult to acquire thereby making deliveries more challenging. Tesla has promised they’re working to smooth the kinks out. But in the meantime, they’ve also raised prices across their model line.

According to InsideEVs, the Tesla Model 3 — their most bottom-line model — is now selling for $46,990 in 2022. That’s up from $36, 990 a year ago! (In case you’re interested, at the opposite end of the price spectrum, the Tesla Model X Plaid with a range of 333 miles, all-wheel drive and can go 0-60 in 2.5 seconds — will currently set you back $138,990!) 

The company’s stock initially took a hit on the mixed news…

Tesla Inc. (TSLA) (10 min chart)

Source: Barchart.com

…but quickly rebounded.

So?

Since earnings reports aren’t always about money, let’s think about it…

Why Tesla May Be a Good Buy Now…

Cathie Wood, CEO of the ARK funds, has been one of Elon Musk and Tesla’s biggest fans for a long time. 

She loaded up her first ARK Innovation fund (ARKK) with Tesla shares back when the company was trading in the teens. And then rode it to fame and fortune (and a fivefold gain) from March to December 2020.  

Her fund has taken its lumps since then, dropping nearly 80% from its high in February 2021. 

But Cathie Wood is undeterred.

So much so, she used the earnings dip to buy more shares…

The guru, who is the founder, chief investment officer and CEO of the New York-based firm, disclosed via the flagship ARK Innovation ETF (ARKK ARKK 0.0%, Financial) that she scooped up 66,190 shares of the electric vehicle manufacturer on Oct. 20. The purchase is valued at approximately $13.7 billion based on Tesla’s closing price on Thursday.

It is also the second time she has added to her investment in Elon Musk’s company this month. The fund bought the dip following a miss in deliveries that Tesla reported on Oct. 3.

If you look a little deeper into the ARK funds, you’ll understand why. 

Cathie Wood isn’t interested in the auto industry. None of her funds hold any other “automakers”…  In fact, none of her funds owns any other EV automakers…

Wood’s funds are about the embrace of “disruptive innovation” — not simply replacing internal combustion engines with electric motors. And her interest in Tesla is all about… 

Software.

A Car Company That’s Not a Car Company

Back in January 2021 Tesla was trading with a P/E ratio of over 1,400. That meant investors were willing to pay $1,400 for $1 of earnings. In any other universe, that kind of valuation is insane. Certainly where car manufacturers are concerned.

But Tesla’s valuation has never been based on them selling electric cars.

That kind of valuation can only be justified by viewing Tesla as a software company. For as long as the company has been building and selling cars, they’ve been hard at work creating what’s known as self-driving technology or auto-pilot.

You’ve probably heard of this feature. It’s not exactly new. Some version of “automated driving assistance” have been in development long enough for the auto manufacturing industry to have developed classified levels of self-driving capability:

  • Level 0    No automation
  • Level 1    Semi-automated systems, like cruise control.
  • Level 2    Semi-automated systems, like steering, speed and braking.
  • Level 3    Primary driving functions are automated under some conditions.
  • Level 4    Primary driving functions are automated under most conditions.
  • Level 5    Primary driving functions are automated under all conditions.

There are a number of third party, OEM companies working on developing something to fit this bill. Most haven’t progressed past the Level 2 category. 

Tesla, however, has received the lion’s share of market recognition for it. And not always good. 

It’s been involved in a number of serious crashes over the years. 

In nearly all its versions, their self-driving technology requires an “attentive driver” with both hands on the wheel.

And it ain’t cheap. In late 2020 MotorBuscuit reported:

To add insult to injury, the previous $8,000 premium for the unusable [Tesla] tech has now been bumped up to $10,000.

A couple years ago, Musk announced the development of “Summon” — a button on your key fob that would bring your car to you. (That idea fell by the wayside last year.)

If you’re thinking, “What the hell?!?! How can Elon Musk make promises like this AND charge money on top of it?” remember that Steve Jobs sold the first iPhone before it even had a cut and paste function! 

There’s something called Roger’s Innovation Adoption Model. It’s a bell curve you can see below…

As you can see, there are always those who will pay for the newest thing regardless of how perfectly it works (or not).

Launching fleets of self-driving taxis or self-driving semis would revolutionize the transportation landscape.

And the company that implements the most complete version of something like this, has the potential to dominate the market. (Think of all the PCs that were sold with the Windows O/S licensed on them. Same thing.)

That’s the upside for Tesla’s software business.

The Big Risk Facing Tesla

If you want to own Tesla, you have to be clear what you’re buying. You should own it because you believe self-driving technology will be the thing in the future. And because you believe Tesla’s version of it will be the industry standard.

And if you want to keep looking at Tesla as a potential growth stock, you should believe that its wider acceptance is just around the corner — 5 to 8 years away. If their jump across the “chasm” to dominate the market goes beyond that, they’re likely to be trading in a sideways range for a very long time. 

It’s a well established pattern in disruptive tech stocks. Back in the late 90s, Cisco was priced so far ahead of its earnings, that after the tech collapse in 2000, the company never regained its previous highs. In 2011, Cisco started paying a dividend (which isn’t a bad thing) and forever lost its growth stock status.

Cisco Systems Inc. (CSCO)

Source: Barchart.com

Tesla is showing the same potential pattern.

Tesla Inc. (TSLA)

Source: Barchart.com

The Other Thing…

There’s another factor that could be a threat to Tesla stock. I call it CEO risk.

Tesla stock is down nearly 45% year to date. (And with those numbers, it’s probably the brightest light in the ARK portfolio.) But part of the reason the stock has been under pressure has been because of Elon Musk’s idiotic Twitter deal:

Mr. Musk, Tesla’s largest shareholder, has sold more than $15 billion of Tesla stock this year, indicating that at least some of the proceeds would be used to finance his $44 billion deal for Twitter. Some investors have worried that he may need to sell more to close the transaction. Mr. Musk has said after recent sales that he didn’t intend to sell more Tesla stock.

The problem is, when you’re trying to lead two public companies, you’re never really the master of either. It was the problem Jack Dorsey faced trying to be CEO of Twitter and Square at the same time. 

Musk is already leading three major companies outside of Tesla… SpaceX, Starlink, and the Boring Company.

It would be a huge irony if Musk buys Dorsey’s albatross (Twitter) only to find that his attention there puts his other major interest (Tesla) at risk.

View Tesla accordingly…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Confidential