Tesla: 7 Reasons to Short Stock (NASDAQ:TSLA)

Dear readers,

I was Tesla company (Nasdaq: Tesla) for over a year and have published a number of articles about the stock here on Seeking Alpha. Most recently, after disappointing Q4 2023 earningsI have issued a Strong sell rating At $177 per share I informed readers in the comments section that I initiated a (large) short trade shortly after publishing the article.

My short thesis was based on the decline of fundamentals, in particular (1) slow revenue growth, (2) lower margins, (3) softening the electric car market, above all (4) An expensive valuation with limited upside that had a lot of potential downside.

Since my last article, Tesla’s stock price hasn’t moved much, but the company’s overall performance has been very poor. More importantly, fundamentals have gotten worse, especially after Q1 2024 earnings Relatively recent Call Cybertruck. Tesla might as well slid Compared to its competitors, it moved from a leader and fastest growing electric vehicle manufacturer to one of the few brands that saw its sales decline year-on-year in the first quarter.

Following Musk’s unannounced visit to China in late April and rumors that Tesla might team up with Baidu (BIDU) to help launch Full Self-Driving (“FSD”) in China, the price jumped 11% to around $190 per share and was up 11%. %. Short position.

In the wake of these developments, an ever-inflated valuation, and what I believe was an overreaction to Musk’s visit to China, I am now more confident than ever in my short selling. Below, I present Seven reasons why (I believe) Tesla may not be a good investment today And why it’s a good short candidate at the current price of around $176 per share.

1- Decline in demand

Demand for electric vehicles has slowed significantly since the outbreak of the pandemic, and as inflation and interest rates increase, people are becoming more conscious of their spending and becoming more conscious of their spending. The market will likely become quite saturated.

CEO Elon Musk himself said the following about the current situation:

The global adoption rate of electric vehicles is under pressure, and many other automakers are pulling back from electric vehicles and pursuing hybrids instead.

This suggests that automakers expect stronger demand for hybrid vehicles, rather than pure electric vehicles. Musk has disputed this view several times and seems certain that pure electric vehicles are the future of transportation. But at the same time, despite the industry’s expected long-term annual growth rate of 16%, the trend appears to have turned in the short to medium term, with the result that demand for EVs may be lower than expected.

Most recently, Tesla deliveries during the first quarter missed expectations by a wide margin of 13% and fell on a quarterly basis for the first time in four years to just 386,000 vehicles.

Tesla was not alone in its biggest competitor – BYD Company (OTCPK:BYDDF) saw a bigger decline QoQ as sales fell from 526,000 vehicles in Q4 to just 300,000 in Q1, returning the title of best electric vehicle seller back to Tesla.

2- Increasing competition

With questionable short- to medium-term demand for pure electric vehicles, maintaining and growing market share is as important as ever. Tesla now has about 50% market share in the US electric vehicle market. Worldwide, its market share is much lower, around 20%, and is similar to BYD’s. But growing (and even maintaining) market share won’t be easy.

Despite weak results in the first quarter, BYD remains a formidable competitor and is heavily focused on China, which benefits from being the world’s fastest-growing major EV market in terms of penetration, giving BYD a competitive advantage.

Besides BYD, other automakers are also gunning for market share, most notably Ford (F), General Motors (GM), NIO (NIO), Volkswagen (OTCPK:VWAGY), and Rivian (RIVN), all of which are offering EV options. Good prices today.

In my last article, my bullish view assumed that Tesla would reach a 30% market share by 2030, while my bearish view assumed a more conservative 17% share, consistent with today’s market penetration. I still stand by these numbers in the long term, but I realize that getting there may be a bumpy road and that the short- and medium-term prospects are not great, especially in light of recent lower-than-expected GDP growth and consumer weakness.

3- Declining revenue growth

The aforementioned weak demand, combined with forced price cuts, led to a 9% year-on-year decline in revenue, which was a significant milestone. Eight consecutive quarters of slow growth.

Musk had previously indicated that revenue growth could be “significantly lower” in 2024, but actual results were worse than already low expectations, with profits and revenues beating expectations in the first quarter.

In the past, for a while, Tesla was able to grow its revenue by 40-70% annually, which put it miles ahead of its competitors and played a major role in justifying the stock’s premium valuation compared to its auto industry peers that tend to grow at 8-10% at most. . However, after the decline, it is clear that Tesla, at least in the short term, has failed to deliver on its promise to be more than just a car company.

4- Decreasing margins

The theme of not being that special, after all, is further reinforced by lower margins.

After a significant decline in profitability in the last quarter, first-quarter results produced a lower gross margin of 17.4% and Operating margin is only 5.5%This is well below the auto industry average of 8%.

I mentioned in my last article that some analysts were expecting lower commodity prices to lead to lower manufacturing costs and thus ease pressure on margins. But my expectation was that the savings would likely be passed on to the consumer in the form of lower selling prices – a view that turned out to be correct in light of lower margins.

In response, the company announced that it would lay off 10% of its global workforce (about 14,000 workers) to boost profitability.

5- CyberTurk failure

I’ve previously argued that before a significant production ramp-up, Cybertruck is unlikely to translate into higher earnings over the next 12 to 24 months, putting further pressure on margins. This was true.

To make matters worse, Tesla recently recalled all 3,800 Cybertrucks it has been able to deliver so far, due to a faulty accelerator pedal that could malfunction.

This, in my opinion, is another nail in the coffin for a product that can at best be described as an expensive distraction from Tesla’s core products.

6- High valuation

I want to start by pointing out that all of Tesla’s profits today come from selling cars. This is because none of the other sectors (energy and services) are profitable yet. Last year, Tesla generated earnings of $3.12 per share. I expected earnings this year to have the potential to grow by $4 per share, a target that was below consensus at the time. But after weak first-quarter results and a worse near-term outlook, the consensus estimate for this year’s earnings has fallen to just $2.60 per share.

At $177 per share, the stock is actually trading at 68x forward earnings. Is this justification for a company with low revenues and an operating margin of 5.5%? I certainly don’t think so. So, let’s evaluate Tesla’s valuation in two ways.

Firstly, Tesla is overvalued relative to its peers with BYD trading at 20x earnings, despite having similar growth prospects and a similar operating margin. Sure, BYD may not be invested in other sectors, but since none of them are profitable today, a higher 3.5x valuation multiple is difficult to afford.

secondReturning to the bear and bull issue from my previous article and looking at a lot With lower growth expected in 2024, Tesla’s growth should accelerate, meaning quite higher than I assumed before. Remember, my bull case called for increasing market share to 30% and EPS to $15.50 by 2030. This means annual EPS growth of 25-30% over the next six years. With lower expected earnings for 2024, if Tesla wants to reach EPS, growth after 2024 must accelerate to 35%. For the bearish case, which assumed a more conservative 17% market share, the 16% growth that was supposed to deliver EPS of $8.82 by 2030 should accelerate to 22%.

Is such an acceleration in growth possible? I believe. But I don’t think that’s likely.

Assuming an earnings exit multiple of 12 times, which is higher than the average 8-10 times for traditional automakers like Ford or GM, and a discount rate of 8%, the bullish case yields a fair value of $110 per share. The bear case produces a fair value of $62 per share. Both are well below the current price, leaving plenty of downside potential for my short position.

7- Dangerous technical level

While the upward jump in prices during Musk’s surprise visit to China was nice, it doesn’t invalidate the sale. From a macro perspective, Tesla’s chart recorded lower highs. Furthermore, we continue to trade below the 200 EMA which is likely to form meaningful resistance around $200 per share, and more importantly, there is not much support below the current price. With a little support at around $140 per share, if shares sell off, the price will likely drop to $100 per share very quickly. At this point, I would consider exiting my short position.

risk

If you simply decide to pass up the investment opportunity, your risk will be limited. Sure, you may miss out, but you won’t incur losses. If you sell the stock, the biggest risk is that (1) The outlook for electric cars will improve, which could lead to stocks rising or so (2) Musk will create some kind of hype around a new product, surprise visit, tweet, etc., which could cause the price to rise. I fully expect my trading to be volatile and I intend to hold it for at least several months, if not quarters. Over time, I think the market will realize that Tesla has not delivered on its promises and is significantly overpriced.

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Tesla, Inc. is facing… A difficult macroeconomic environment, increasing competition, and slowing demand for electric vehicles. As a result, the company reported weak numbers for the first quarter. Despite this, TSLA stock trades at a fantasy valuation of 68 times forward earnings. I reiterate my Strong Sell rating for Tesla, Inc. stock. Following first-quarter earnings and the announcement of Musk’s surprise visit to China, here is priced at $177 per share, with a price target of around $100 per share.

Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these stocks.