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Tesla, Inc. (NASDAQ:TSLA) is a stock I had no interest in throughout the Covid bubble. Finally it changes. As the stock price plummets and earnings soar, it finally becomes a company you can fundamentally enjoy. I detailed this in my December 15 piece titled: “With a forward P/E of 28, is Tesla now a value stock?”
As the price continues to fall, we are now at a forward multiple of around 22-23x, for the fiscal year ending December 2023. After that, we are in for a – gasp! Teenagers are springing up for what was previously the poster child for Covid mania.
Of course, refutations of what I just said will be things like BMW (OTCPK:BMWYY) trades at a P/E of 4x, or even better than the Toyota breed (MT) is 10x. I started learning over 20 years ago that equity-based investing uniquely on low P/Es also led to low returns.
Since the sale of my company, I have lived entirely on my investments, so yes, I own a lot of stocks that are high yielding and with little or no growth. That’s how I classify incumbent automakers, and frankly, I think there are better risk/reward industries out there for this type of investment. Instead of those debt- and pension-laden ICE (internal combustion engine) makers, who now have to cannibalize those sales with their money-wasting EVs (electric vehicles).
If you disagree, just look at their decades-long history. YCharts won’t allow me to generate this for 20 or 30 years, but believe me, this underperformance is just as ugly. If they couldn’t deliver alpha during 100% ICE days, how are they going to deliver during the secular transition to EV?
You shouldn’t expect Tesla to trade at an earnings multiple comparable to traditional automakers. In summary, here’s why:
- Tesla is an electric vehicle company from the ground up. They don’t go through ICE’s messy manufacturing transition.
- Tesla, being an all-EV company, receives regulatory credits for free. They have a surplus. Meanwhile, nearly every other automaker is running a deficit, so they have to buy credits from Tesla and others to offset their ICE sales.
- Tesla cut out the middleman; the dealer. Admittedly, margins on new vehicle sales are minimal for dealerships. Still, it’s more money for Tesla.
- Tesla isn’t drowning in debt and pension obligations. In fact, they have net money. Yes, a lot of automaker debt comes from financing vehicle purchases. However, contrary to consensus, this is higher risk debt. How many people do you know who are on their way with a new luxury car or truck, versus their job security and income in a boom and bust economy?
- Tesla has technological superiority. I get some questionable faces on this trail, but overall even the bears agree it’s true.
- Tesla has other bets, like those related to the FSD. If this and other bets succeed, even if well below Cathie Wood’s projections, it will still mean a massive increase in revenue. The same cannot be said of the greatest historical car manufacturers.
If the sales are so good, why the 12% discount?
You’re here
The $7,500 discount equals over 12% off Model 3 above. That’s a lot for a company that doesn’t normally give discounts!
To be clear, they do not offer a fixed discount percentage, as the percentage achieved will vary depending on the purchase price.
So why $7,500?
Because of the Inflation Reduction Act, a misnamed law if ever there was one. It includes a $7,500 tax credit for electric vehicles. Not just for any EV, though. It stipulates where not only the cars are assembled, but also their batteries and where their materials come from. Must be North America or no credit.
Previously, it didn’t matter where the cars were made or how much they cost. Even the Bentley Hybrid SUV qualified. Due to the cap of 200,000 vehicles per manufacturer, Tesla sales have not qualified for some time.
Everything changes on January 1, as the manufacturer cap is removed. Again, people who can afford an $80,000 car also get a tax credit of $7,500 to, uh, reduce inflation?! Whatever that logic is, it’s great news for Tesla.
Not so much, though, if you bought a Tesla this month, or really any time since the legislation passed in August. If your adjusted gross income is less than $150,000 ($300,000 for co-filers), you’re essentially saving $7,500 by waiting until January 1 to pick up your new car.
With that, of course, domestic inventory was piling up in the fourth quarter. Is it any wonder Tesla decided to match the upcoming tax credit, move that inventory now?
If the stock price hadn’t fallen off a cliff, they probably would have waited. They started with a $3,750 discount on December 1. With a nearly 30% drop since then, it’s understandable why they raised it to $7,500. They know they need explosive delivery numbers for the quarter, to hopefully turn the tide.
By discounting some vs. all sales
How much will the $3,750 to $7,500 lower the average sale price of the Model 3 and Model Y?
Maybe not much at all.
They basically waited until the last minute of the year to make a discount, although the 2023 credit has been known since August. The question is how many people since then postponed their purchase, that we do not know.
Given the income threshold, for some, the upcoming credit didn’t matter anyway since they didn’t qualify. For them, it actually made sense to buy one now from inventory, even if it wasn’t the exact color and specs they wanted, because it would be $7,500 off until the December 31st.
I am in Los Angeles and I received the SMS:
from own phone
Yes, I had to tell the so-called Trevor to stop. This is Tesla’s general text number for deliveries and more, not a personal line. This is an automated marketing text designed to be personal.
I went to Tesla’s website that morning and only saw a few dozen cars within a 50 mile radius. When I checked a day later for the purposes of this article, Friday the 23rd, there were no cars available within 200 miles of Los Angeles.
I found some all over the country, within 200 miles of random zip codes, but on Christmas Eve morning I couldn’t find any.
When available, these were all the most expensive packages. Nothing close to the base models was discounted by $7,500.
That being said, on Christmas Day I walked past their store in Long Beach. This is one of their few stores (not just showrooms) in LA. The parking lot was packed, but with no inventory to buy, I’m not sure of the explanation.
Take-out?
Tesla probably emptied the inventory. Yes, with discounts, but that should bode well for Q4 deliveries domestically.
China, on the other hand, remains a wild card. They stopped production in Shanghai earlier, on the 24th, as part of the planned year-end break. This has never happened before. No reason given, we don’t know if its request or related to Covid. It may be the latter, given that the sources have reported illnesses to this gigafactory and supplier factories.
Fourth quarter deliveries are expected to be reported in the first days of January. Wedbush’s otherwise optimistic Dan Ives doesn’t sound optimistic. Criticize Musk and drop in estimates at 410-415k (vs. 450k before). The street whisper number is around 435k.
If Tesla disappoints even after the refresh, it will certainly be time to reassess the 2023 projections. That said, there’s a chance the opposite could happen, with Tesla reporting explosive numbers for deliveries. Don’t be too bearish.
Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Please be aware of the risks associated with these actions.
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