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In the Year To Date (YTD), Tesla, Inc. (NASDAQ: TSLA) is the worst-performing stock in the Nasdaq-100 Index. The company’s line item performance in first-order (i.e., Year-on-Year) terms indicates that 2023 wasn’t quite as explosive as they were in the past two years.
Source: Company Financials; Leverage Shares analysis
An increase in automobile revenues – and earnings per share (EPS) – was accompanied by a nearly equivalent drop in gross profits and adjusted EBITDA. Free Cash Flow also saw a decline along with an increase in operating expenses. All things considered, the company missed analysts’ consensus by a small margin and the company’s stock is currently flashing at “Hold” in many stock pickers’ lists.
A large factor behind the revisions towards a “Hold” is in the automotive market dynamics.
Automotive Market OverviewOver in China, where its operates a factory with a capacity of 950,000 vehicles, Tesla has reportedly1 slashed the number of working days by 23% (down to 5 days a week), with some production lines such as the battery workshop subjected to even longer suspensions. Tesla’s sales in China (where its Model 3 and Model Y start at a little over $35,000) are trending towards a slowdown: while total sales were up 15.23% (with 70,022 units sold) on a YoY basis for the first two months of the year, sales were down 11.15% in February alone – which is a lead-up to months with heavier sales volumes – amidst steadily-increasing YoY penetration by local brands offering EVs in both retail and wholesale segments. Exports from the China plant were down 22.46% for the first two months combined on a YoY basis. Overall sales of Battery Electric Vehicles (BEVs) in China were up 18.06% for the same period.
When differentiated by model year, brand, model name, version (battery or drive type) and wheel size in inches, Tesla finds its home turf (the United States) replete with competition: only about 10% of around 300 products on offer slated in 2023/2024 are from the company. The heaviest level of competition – nearly 98% of all releases – are squarely aimed at all three price ranges that Tesla retails its American offerings at. Almost every single major legacy carmaker is in the fray with steadily rising and consistent sales on a YoY basis that is eating up Tesla’s once-commanding market share, which is now hovering around the 50% mark.
Be it in the U.S. or China, a median-performance BEV typically isn’t cheap. A Hybrid Electric Vehicle (HEV) – which switches between an internal combustion engine (ICE) with an electric-powered motor and charges its battery autonomously through energy from the former – are often significantly cheaper. Next up in the list and typically below the BEV is the Plug-In Hybrid Electric Vehicle (PHEV), wherein the battery is replenished via a charger (like BEVs) and propulsion switches to an ICE when the battery is depleted.
The pricing matrix for HEVs and PHEV is largely patterned on fuel efficiency. For instance, an ICE-powered Toyota RAV 4 delivers a fuel economy of 27 miles per gallon (mpg), the HEV version does 41mpg, while the PHEV version delivers 94MPGe*.
*MPGe is “miles per gallon equivalent” which isn’t quite the same as “mpg.” As per the U.S. Environment Protection Agency, it represents the number of miles the vehicle can go using a quantity of fuel with the same energy content as a gallon of gasoline.Batteries typically make up around 40% of a BEV’s cost. PHEVs tend to have smaller batteries, which typically make them cheaper than their nearest BEV equivalent. HEVs’ batteries tend to be even smaller, which tend to make them even cheaper.
In the U.S., among all New Energy Vehicles (NEVs), HEVs have always ruled the roost. As of February, Toyota accounts for well over half of HEV sales.
Source: Argonne National Laboratory; Leverage Shares analysis
Light-Duty Vehicles (“LDVs”, which include cars and light trucks) have been meandering with a bearish trend since 2015 (with passenger cars showing downtrends while sales of SUVs, pickup trucks and vans remaining somewhat buoyant). Within these bearish trends, however, NEV sales have been resilient and bullish. Within NEVs, BEVs have just begun to show a downtrend in 2023 while “Hybrids” (be it HEV or PHEV) have been growing very steadily. Within “Hybrids”, the share of PHEVs have been on the rise since 2019 and helping lift the sales of all BVs (“Battery Vehicles”, i.e., BEVs and PHEVs). During years of all-round positive YoY growth in NEVs, PHEVs have begun to display outsized YoY growth relative to BEVs and HEVs.
The distribution of charging networks in the U.S. is heavily skewed in favour of a select number of states.
Source: U.S. Alternative Fuels Data Center (U.S. Department of Energy); Leverage Shares analysis
Relative to 2019, 47 states have registered a triple-digit percentage increase in DC Fast Charging outlets available to the public while 30 states have shown similar levels of increase in Level 2 outlet availability. Despite these trends, it is a fact that comprehensive coverage of charge infrastructure heavily disfavours almost all of Middle America. This is a problem: with lower availability of charging infrastructure, there is a greater disincentive towards buying BEVs. When choosing between NEV types, HEVs and PHEVs have a substantially greater advantage.
Unlike in China, which has a mandated common charging standard, the U.S. doesn’t. At least 4 different standards exist, including Tesla’s “Supercharging” standard. On top of that, recent surveys indicate3 that nearly 1 in 5 EV owners reported an inability to finding a charging port to replenish batteries “on-the-go,” which is up from 1 in 7 in 2020. The reasons for this vary from weather conditions knocking out the device to vandalism and theft for the copper wires within.
Among fast-charging stations, Tesla’s Superchargers account for slightly more than one-quarter of all fast-charging stations and one-third of all outlets in the United States. While Tesla had earlier stated that its fast-charging infrastructure is exclusively for Tesla owners, they now have been offered an incentive to open up this to non-Tesla owners, courtesy of the 2021 Bipartisan Infrastructure Law which allocates $5 billion to the buildout of a charging network along major roads and $2.5 billion to charging within communities.
To qualify for a piece of the $7.5 billion action, it was announced4 on February 15 that Tesla will open up 7,500 chargers from its Supercharger and Destination Charger network to non-Tesla vehicles by the end of 2024. The “Tesla charging standard” is now the “North American Charging Standard” (NACS, pending for certification as SAE J3400). BMW, Mini, Rolls-Royce, Mercedes-Benz, Volkswagen, Hyundai, Honda, Kia, Mazda, Nissan, Geely, Volvo and Stellantis have all announced that NACS will be available as a default starting from 2025.
Source: Mercedes-Benz Press Release
Tesla isn’t the only carmaker with an exclusive edge in the ownership of charging infrastructure. Ionna — an alliance between BMW, General Motors, Honda, Hyundai, Kia, Mercedes-Benz, and Stellantis — will be deploying 30,000 high-powered charge points across the U.S. and Canada that will be open to all car makes.
In ConclusionAcross the U.S., given the overall paucity of charging infrastructure and the cost of a BEV, it stands to reason that PHEVs offer the next best option for the vast majority of buyers. The driving factor behind why BEVs are so heavily highlighted is the price: about 80% of all 2023/2024 variants announced in the U.S. are in the $50,000 – $200,000 range. The higher the price, the better the margin. Also, customers able to afford the ticket are tend to be more inured to the vagaries of the affordability crisis roiling America, thus making them more likely to be persistent buyers.
For all others, including those who want more flexibility in sustained usage, PHEVs are the way forward, which U.S. buying trends confirm over the past decade. Incidentally, China shows similar trends: while BEVs registered an 18.06% increase in sales in the first two months of this year, PHEVs registered a 74.93% increase in the same period. More than 70% of China’s public charging network5 is in 10 of the most economically developed provinces and municipalities, with only 30% of all charging points open to all car makes.
As it stands, Tesla’s current BEV market share is near-constantly being eroded due to a variety of carmakers offering a variety of value propositions, a more extensive dealer/service network and a longer operational history of success to the very same consumer segments it is currently catering to. Tesla’s original master plan in 20066 indicated that its strategy was to manufacture luxury models first and then use the profits generated to finance a “low cost family car”, the first of which would likely have been the long-rumoured “Model 2” priced at $25,000. A report this past Friday7 contends that this goal has been scrapped in the wake of fierce competition globally from Chinese EV makers offering much-cheaper models. Instead, the company intends to use the small-vehicle platform under development in its “Robotaxi project, which is expected to have an unveiling8 on the 8th of August.
The Robotaxi will likely be an extension of the company’s Full Self-Driving (FSD) capability, made available via a block sum of $12,000 or a monthly subscription of $199. However, the company indicates that an FSD-enabled vehicle doesn’t make the vehicle autonomous and requires “active driver supervision”. Currently, several major carmakers are focused on fully-autonomous driving but truly autonomous operation is still several years away; the requirements on the complexity of the AI to enable this is the primary bottleneck and regulators are loathe to approve fully-autonomous driving after a series of tests by many carmakers in the fray found them to be prone to mistakes and accidents. Nor is this the first time that Tesla CEO Elon Musk had promised a “Robotaxi”, with the most recent promise being in 2019 when he predicted that the “Robotaxi” will be unveiled in 2020. He predicted that these autonomous cars would last 11 years and drive 1 million miles while making the company and the car’s operators $30,000 in profit each year.
Overall current sales trends and market competitors being able to offer a wider variety of interesting options in both of its primary geographical markets are major factors in the consideration of the stock’s valuation, which has been in general decline in the YTD. Barring a brief rally in February, the stock’s Price-to-Earnings (P/E) Ratio is down 31% from that registered at the start of the year. Given that the industry average is 15-18 versus the stock’s current P/E Ratio of 52.7, there is significant potential for this ratio to be corrected downwards another 20-45%.
While investors have shown some interest in the stock in the aftermath of the “Robotaxi” announcement, there is also a significant amount of skepticism about the claims being implied by the company’s die-hard proponents. Near-term turbulence in the stock price can be expected but long-term opinion on stock valuation would be entirely in line with the majority of stock pickers’ valuation unless the company can make some powerful and strategic announcements.
Footnotes:
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If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
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The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
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