Education Series: Single-Stock ETPs

Tesla Bubble popping? 

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  • TSLA Valuations are sky-high
  • Competition is heating up
  • Insiders are dumping shares like there is no tomorrow
  • The whole market is in danger of crashing

When it comes to Tesla (TSLA), valuations seem to be on another planet. A combo of never-ending faith and hype has fuelled its price to skyrocket in outer space. Everything has to be priced to perfection for the Electric Vehicles (EV) car maker’s monstrous valuation to be justified.

Tesla sales have been strong recently, but despite the strong sales numbers that came out on Monday, a metric has been critical for the company as it is a close estimate of what its next quarter (Q322) revenues will be, the astronomically high consensus expectations were not met.

The EV leader missed its car delivery mark by 5%. Actual 343 830 units came below street expectation of 358 000, (translating to a $300m loss of gross profit according to Morgan Stanley estimates) due to logistic issues that widen deliveries and production gap. As a result, $72bn of Tesla’s market capitalization vaporized overnight with shares nose-diving 8.6%, while the stock market closed with sharp gains.

High Valuations

Investors seem to be skating on thin ice believing that Tesla’s impressive past performance is indicative of its future returns, but is that the case?
Tesla’s mind-blowing EV/EBITDA = 59, is 4.3x its peer average multiple, Revenue cumulative annual growth rate (CAGR) over the next 10 years is projected at 26% (vs historical 10 year Revenue CAGR 75%), 2.3x vs peers. Those numbers clearly illustrate that past performance is not indicative of future results.
Shareholders are paying a lofty premium with the justification that Tesla will continue to grow its top line at a staggering pace far above its competitors due to its superior products, while its peers are left in the dust, essentially given a discount for the lack of growth due to their inferior cars.

Growth stories come and go. Look at similar growth, miracles in the past such as Facebook (META) and Peloton (PTON), in both cases the growth stores did not pan out, and as a result, their P/S multiples came down crashing to a more meaningful, single-digit numbers.
Tesla’s current P/S of over 10 is pricing in that there will be no one to overthrow the king of the EV hill. But how long can this growth hypothesis hold that Tesla will continue conquering the EV sales world? Hidden risks such as Tesla’s overly ambitious pipeline might cause further selling (to the downside will) and put a serious crack in the growth story narrative, which starts to lose steam, causing a huge sell-off like the one yesterday.

Competition is heating up

The effect of higher competition leads to lower market share, and usually, the industry leader must slash prices to keep its market share from falling. If Tesla is forced to slash prices, its future revenue projection may tumble along with its valuation, similar to what happened yesterday.
On top of that, the market seems to be under-pricing the fact that Tesla’s market share indeed has been eaten away by its peers over the last 2 years.

If we zoom in on the rivalry between Tesla and BYD, we will see that the Chinese car manufacturer has been outperforming its US rival in the largest and fastest growing global market – China.
EV sales in China account for over 55% of the global market. Fierce competition from BYD has led to a serious grab in market shares, from Tesla, and a number one spot in its domestic market China.

Elon Musk rival BYD consolidating further its number one spot in the world’s largest and fastest growing market for electric vehicles – China.
The Chinese car manufacturer has been outperforming its US rival in terms of production numbers, in both Q2 and Q3 of 2022. BYD numbers dwarfed that of Tesla in the last two quarters as the Chinese giant greatly extended its overall vehicle lead over Tesla with 3Q22 deliveries of 537 164 smashing Tesla numbers of 343 830 units delivered.

Insiders’ heavy selling

Mr. Musk has been dumping stock quicker than his cars can accelerate!

  • $5 billion in late 2021
  • $8.5 billion of the stock in Q1’2022
  • $6.9 billion in Q2’2022.

This is a serious red flag for the company’s future price and Ellon is not alone. Combined all insiders have sold nearly 34 million and bought ZERO shares of TSLA over the last 12 months. Yes, you have read correctly, that is zero shares over the last 12 months! No insiders have bought any TSLA stock – actions speak louder than words, perhaps insiders are rushing in to cash their tesla positions in a similar fashion to the rats that leave the ship before it sinks.

Simply, higher interest rates lead to a jump in bond yields, causing financing to become more expensive for companies to fund their business operations and compressing their equity valuation, in simple terms the price craters. Even Mr. Powell issued a dire warning to the markets: “The chances of a soft landing are likely to diminish…”! Translation, there is more pain for the equity market.
Given that Tesla price is more volatile and positively correlated with the US Economy, as has the potential to fall quicker and to a greater extent than the market (SPY), which has been in pretty much in a free fall since July thanks to Jerome Powell. It seems that, even Cathie Woods’, deep pocket on 03.10.2022 buy could not save TSLA share price from melting down.

In conclusion:
  • Nobody is invincible, success stories come and go
  • Remember what happened with Nokia in the 00s, as fierce competition by Samsung and Apple annihilated the Finnish company’s margins and market share.
  • The fact the company insiders have been selling relentlessly is a huge red flag
  • The company is facing more serious competition than ever combined with a looming economic recession that might have a detrimental effect on its valuation

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

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Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

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Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

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He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

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