For years, Tesla (NASDAQ: TSLA) stock and its bullish supporters have been asking investors to disregard the company’s shortcomings and focus on its long-term growth story.
In 2019, Tesla’s shortcomings are still plentiful. Unfortunately, its growth outlook isn’t looking nearly as impressive as it once did.
Tesla’s Growth Is Slowing
Since Tesla stock first went public, there have been plenty of things to criticize about the company. Its profits have been few and far between. CEO Elon Musk has generated a parade of self-inflicted publi- relations wounds. TSLA has repeatedly missed its production goals and financial targets. Yet up until now, those who are bullish on Tesla stock could always point to its impressive revenue growth as a cure-all. Eventually, they have argued, everything else will get better.
In fact, Tesla’s revenue more than tripled over the past three years. That’s certainly the kind of growth numbers that often command a high premium on Wall Street.
The highly anticipated launch of the Model 3 was supposed to be Tesla’s path out of the luxury box and into the mass market. This year was supposed to be the year TSLA turned the corner. Unfortunately, according to analyst Rajvindra Gill of research firm Needham, the exact opposite is happening to Tesla.
Here’s how Tesla’s growth numbers are lining up so far in 2019. In the first quarter, Tesla reported a 45% year-over-year decline in combined Model S and Model X deliveries. TSLA reported revenue growth of 83% in 2018. Needham is forecasting that its revenue growth will drop to just 12% in 2019.
It’s Not a Temporary Problem
Tesla stock bulls may argue that the rough start to 2019 is just a temporary bump in the road. But for 2020, Needham forecasts just 15% revenue growth for Tesla.
Those who are upbeat on TSLA stock have said that the company’s Q1 numbers were soft because the elimination of the company’s electric-vehicle tax credit pulled demand forward to Q4 of 2018. Yet the combined deliveries of Model S and Model X in Q4 were actually down 3% compared to Q4 of 2017. The quarter-over-quarter increase in Model 3 deliveries dropped to just 13% in Q4 compared to 200% growth in Q3.
At the same time revenue growth is plummeting, the lower-cost Model 3s are eating into TSLA’s gross margins. Needham’s Gill predicts that its margins will drop to just 19.5% this year.
Bank of America analyst John Murphy says the owners of Tesla stock who have grown accustomed to Model 3 delays can expect more of the same in coming quarters.
“Ultimately, given what appears to be slower than anticipated progress on the Model 3 production ramp, TSLA’s past production/ logistics challenges on the Model S/X, and now potentially new challenges with deliveries to Europe and China, we expect it will take some time before the Model 3 production/sales reaches mass scale,” Murphy says.
In the meantime, TSLA continues to burn through cash. Needham expects Tesla’s net cash position to decline by $2 billion in Q1. Tesla is attempting to shore up its cash position by accepting $2,500 deposits on its recently unveiled Model Y vehicle, despite the fact that it won’t be available until late 2020 at the earliest.
The Valuation of Tesla Stock Remains Suspect
Based on Needham’s projections of EPS of $1.25 in 2019, TSLA stock trades at a 2019 forward price-earnings multiple of about 217 and a 2020 forward PE of about 55.5. Those valuations are extremely high, even for the tech sector.
Of course, Tesla stock bulls may argue that other disruptive tech giants like Amazon (NASDAQ: AMZN) and Netflix (NASDAQ: NFLX) also have high forward earnings multiples. But Gill predicts that Amazon, Netflix, Facebook (NASDAQ: FB) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) will all have higher revenue growth rates than Tesla in 2019. Furthermore, that group of four tech stocks trades at about a 40% discount to the 2020 PE of TSLA stock, according to Needham’s estimates.
“Net, we contend that investors will struggle with justifying a high valuation if overall sales growth continues to decelerate (or plateaus) and margins remain under pressure,” Gill says of Tesla stock.
In other words, Tesla stock is priced like a high-growth name even though it’s likely not going to be one any more. At least, it won’t be one for the next two years. On top of slowing growth, TSLA is dealing with shrinking margins, questionable demand, and logistical issues with its overseas-expansion efforts. It also has a CEO who can’t keep his foot out of his mouth on Twitter.
Over the past five years, Tesla stock is up just 25% overall, less than half of the overall return of the S&P 500 in that time. Tesla stock investors keep saying it’s a growth name. The numbers are telling a different story.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.