Tesla (NASDAQ:TSLA) continues to face multiple, steep challenges. Plus, the company’s first-quarter results weren’t all that good. If that wasn’t enough, the valuation on TSLA stock remains sky high.
Even CEO Elon Musk thinks so. A recent social media post from Musk sent shares falling — and brought a lot of attention to the electric vehicle maker.
Tesla’s Q1 results, excluding its regulatory credit revenue, were not very impressive. Regulatory credit revenue is money that the company receives from automakers whose vehicles don’t meet fuel emission standards. Under rules from a number of jurisdictions, including California and the European Union, these automakers can avoid fines by buying credits from Tesla. Tesla earns these credits through selling low-emission vehicles.
Excluding the credit revenue, Tesla’s Q1 revenue came in at $5.63 billion, versus a consensus outlook of $5.85 billion. And without the credits, the company’s net loss would have been about $338 million. With the credits, the automaker’s earnings per share came in at 9 cents.
Meanwhile, there are good reasons to believe that Tesla’s regulatory credit revenue could fall meaningfully in coming quarters. First of all, the company’s revenue from such credits dropped after Q1 last year.
Secondly, President Donald Trump’s administration has revamped America’s regulatory credit system. It’s a very good bet that the new system will require lower payments by automakers that don’t meet fuel efficiency standards.
If Trump wins in November, there’s a good chance that his administration could further reduce those fines and payments. Finally, the EU could decide to give automakers a break by relaxing fuel efficiency standards for a year or two.
Oil Prices and Competition Are Still Factors
Two reasons for Tesla’s lackluster Q1 results, excluding the regulatory credits, were likely low oil prices and increased competition. Of course, the novel coronavirus itself likely played a role.
In my previous column on Tesla, I noted that “gasoline-driven vehicles are indeed a direct substitute for Tesla’s vehicles. And I have little doubt that the exceptionally low price of oil will deter thousands of people from buying one of Tesla’s vehicles.”
As oil prices started to drop in February and March, Tesla’s sales probably took a hit.
Meanwhile, over the longer term, “Tesla’s competition looks poised to intensify.” General Motors (NYSE:GM) and Toyota (NYSE:TM) are among the major companies planning to launch their own electric vehicles.
TSLA Stock Has a Sky-High Valuation
TSLA stock has a trailing price-sales ratio of 5.5, versus 0.23 for GM, 0.13 for Ford (NYSE:F) and 0.6 for Toyota. I know that Tesla has a large group of dedicated fans, and that it makes very technologically advanced vehicles, but the valuation disparity seems way overdone.
And remarkably, Elon Musk agrees. He tweeted on May 1 that “Tesla stock price is too high.” A CEO’s message carries a lot of weight.
The Bottom Line on Tesla
Excluding regulatory credits, Tesla’s Q1 results were nothing to write home about. Those regulatory credits are likely to drop meaningfully in coming quarters, and the company is facing serious threats on other fronts.
Meanwhile, the valuation of TSLA stock remains extremely high. Given all of these points, I recommend selling Tesla at its current valuation and looking to buy the shares on a pullback to around $600.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Lyft, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any of the aforementioned securities.
