Tesla (NASDAQ:TSLA) shares seem to have found a bottom. Tesla stock had lost half its value — and touched its lowest levels in almost two and a half years. But after reaching $177, TSLA stock has rallied by more than 15%.
The catalyst seems to be better-than-expected sales for the month of May, at least as reported by InsideEVs. The sale of emissions credits to General Motors (NYSE:GM) and Fiat Chrysler (NYSE:FCAU) seems to have helped as well. With Tesla stock much cheaper, buyers have stepped in.
In the context of TSLA’s plunge, that perhaps makes some sense. But two pieces of good news don’t change the larger problems for Tesla … and seem unlikely to permanently change the broader trajectory of Tesla stock. I’ve been a TSLA bear for some time, and continue to hold a bearish options position on the shares. Recent developments have hardly changed my mind, and even investors who see TSLA stock differently should remember that many problems remain.
Death Spiral Debunked
When it comes the Model 3, the estimate from InsideEVs looks like very good news. The website estimated deliveries of nearly 14,000 Model 3 units. That’s a notable increase from a little over 10,000 in April — and more than double the year-prior figure of 6,250.
The growth — for now — seems to contradict bearish claims that Tesla was entering a death spiral, or struggling with plunging demand after burning through Model 3 reservations. Demand seemingly isn’t exhausted.
That said, the numbers still house some concerns, notably for the Model S and the Model X. On the Q1 conference call, CEO Elon Musk had projected a return to annualized demand for the S and X of 100,000 units. InsideEVs estimated U,S, deliveries for May of just 2,400, a rate under 30,000 a year. Europe can help that number but registration data in key Tesla markets suggest those models are struggling on the Continent as well.
May numbers might be better than those of April but they’re not good enough. The bear thesis here has been that the Model 3 would eat into Model X and Model S sales, something that’s playing out to some extent. Given that the Model 3 is lower-priced, the shift away from X and S sales will have a negative impact on margins and potentially put Tesla’s ongoing profitability at risk.
Model 3 Isn’t Enough for TSLA Stock
Model S and Model X weakness goes to the broad issue with TSLA stock, even near the lows. The Model 3 isn’t enough. This still is a company with a $35+ billion market capitalization. It’s still trading at 1.62x revenue in an industry where nearly every other rival trades at much less than 1x.
The Model 3 — by Musk’s own admission, in his “master plan, part deux” — isn’t enough to support that valuation. Profits aren’t big enough. Capital needs, now and going forward, aren’t enough. Rather, the Model 3 is supposed to be the base for Tesla’s additional efforts to revolutionize automobiles and the energy industry.
Investors have good reason for their increasing skepticism about those other efforts. Musk’s announcement of “robotaxis” eventually worth $250,000 each was met with disbelief. The same largely goes for his predictions of full self-driving vehicles by next year. Musk, in particular, seems to have finally broken too many promises.
There’s another problem, too: Tesla’s capital spending. It continues to fall, which raises the question of what, exactly, the company is doing to prepare for the many new products offered. Musk insists the Tesla Semi will arrive next year — but there’s nowhere, at the moment, to actually build it. The Model Y will be built in Fremont, and take up the rest of the space there, as Musk discussed after Q1.
The China gigafactory is making quick progress but is being built in the middle of a trade war that is driving anti-American sentiment. Competition from Nio (NYSE:NIO) and myriad other in-country EVs gives Chinese consumers plenty of options.
And the energy business is in clear disarray, with revenues plunging and the solar roof nowhere to be found.
Tesla Stock Has More Downside
Unlike some bears, I don’t believe Tesla is heading for Chapter 11. The company may need to raise more capital, as it did earlier this year. But it’s likely it could sell itself if execution doesn’t improve, a recession hits, or growth disappoints. There’s value in the Tesla business.
But I continue to believe that that value is not nearly $50 billion (including its debt), or close. In other words, TSLA stock is badly overpriced. At 30x+ 2020 EPS estimates, for an automotive manufacturer, is a huge multiple. (GM and Ford (NYSE:F) are valued at 5.6 and 12.6, respectively.) Musk has proven to be an exceedingly poor manager, and an exodus of executives leaves little proven talent there to guide him.
The solar business is a mess. Tesla very well could have to dilute its shareholders again in the next 24 months. And there’s the cyclical risk that affects not just TSLA stock, but the equity of every auto manufacturer.
May numbers — even if correct — don’t dispute that thesis. In fact, the Model S and X numbers might even strengthen it. Model 3 growth is helpful – but it’s not enough. Tesla stock can, and should, start falling again.
As of this writing, Vince Martin owns a hedged, bearish put option position in TSLA. He has no positions in any other securities mentioned.