Tesla (NASDAQ:TSLA) stock traded lower on Wednesday afternoon after the company reported fourth-quarter earnings numbers that missed analyst expectations. It may seem strange in a world in which a failing mall video game retailer is the talk of Wall Street, but the actual business a company does will always matter in the long term.
I’ve long been skeptical of Tesla stock and its absurd valuation. At first glance, Tesla’s fourth-quarter numbers look pretty good. Tesla continues to grow and it continues to generate profits after years of losing money.
However, quarter after quarter, Tesla is nowhere close to reporting numbers suggesting an $830 billion market cap is justified. As impressive as Tesla’s fourth quarter was, long-term investors should still stay away from Tesla stock.
The Tesla Stock Numbers
First of all, Tesla’s quarterly numbers likely don’t matter in the near term. So this analysis is only for long-term Tesla stock investors, not short-term traders.
Tesla reported fourth-quarter adjusted earnings per share of 80 cents, short of consensus analyst estimates of $1.03. Revenue of $10.74 billion exceeded analyst expectations of $10.4 billion. In the same quarter one year ago, Tesla reported EPS of $2.14 on revenue of $7.38 billion. Revenue in the fourth quarter was up 45.5% compared to a year ago. Previously reported vehicle deliveries in the fourth quarter were 180,570, up 61.2% year-over-year.
Auto gross margins in the fourth quarter were 24.1%, down 3.6% from last quarter and up 1.6% from a year ago. Free cash flow for the quarter was $1.9 billion, up 88.1% from a year ago. Tesla also slightly increased its reliance on regulatory credit sales. Tesla reported $401 million in regulatory credit sales in the fourth quarter, up 1% compared to the third quarter. However, for the fifth consecutive profitable quarter, regulatory credit sales accounted for more than 100% of Tesla’s net income on a generally accepted accounting principles (GAAP) basis. Regulatory credit sales will eventually drop to zero as competing automakers roll out their own fully electric vehicles.
In summary, Tesla reported what would under different circumstances be considered a strong quarter. However, Tesla has yet to demonstrate it has a profitable business model without relying on fleeting regulatory credit sales.
There wasn’t anything special about Tesla’s quarter. The company is still growing at an impressive pace. It has a first-mover advantage in EV sales, and it is leveraging that position to generate profits. But there is absolutely nothing in Tesla’s numbers to justify anything close to an $830 billion market cap.
Tesla Stock Valuation Matters
Tesla stock continues to be a fairly typical growth stock struggling with profitability. It’s even constantly struggling to hit its growth targets. Tesla originally said it would easily hit 500,000 vehicle deliveries in 2020, but it fell short of that mark.
In the third quarter, General Motors (NYSE:GM) reported $35.4 billion in revenue and $4 billion in net income. And that income does not include regulatory credit sales. In other words, GM generated four times as much revenue in the third quarter as Tesla and did it at a significant profit. Yet somehow Tesla’s market cap of $830 billion is about 12 times the size of GM’s at around $70.6 billion.
Tesla stock bulls always argue that the stock is more like a tech stock than an auto stock. But I have repeatedly compared Tesla’s valuation to both auto peers and high-growth, large-cap tech stock peers like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN).
At 210.8x forward earnings and 29x sales, there is literally no peer group that makes Tesla stock look anything other than grossly overvalued.
Casino Bet
Any clean energy fans hoping for Tesla to succeed should be thrilled with another quarter of strong growth numbers. Unfortunately, the bubble valuation in Tesla stock detached from reality a long time ago. If you want to buy Tesla shares at this point, just understand it is more of a casino bet than a sound long-term investment.
If Tesla continues to put up the kind of growth numbers it reported in the fourth quarter year after year after year and it proves at some point it can turn a profit without relying on regulatory credit sales, the company could eventually be worth its current market cap 10 or 15 years from now. But few investors want to generate a 0% return for more than a decade while they wait for a company to catch up to its stock’s bubble valuation.
Even if Tesla is the next Apple, Apple hasn’t had a single year in the past 20 years in which its stock has gained more than 201% in a single year. Tesla stock is up 629% in the past year and 1,710% in the past year and a half.
How to Play It
Tesla stock has been caught in an EV stock bubble. That bubble has detached the stock from the company. Tesla will most certainly continue to report impressive growth numbers in 2021. But Tesla stock is just as likely to drop 50% in the next several years as it is to rise 50%. The current Tesla stock valuation is based on a story its fanatics are telling each other. It is not based on the numbers the company just reported for the fourth quarter. If the story doesn’t pay out just like those Tesla fanatics anticipate in the next several years, Tesla stock will drop. If Tesla stock investors decide they like another story stock better, the stock will drop.
Tesla reported a great quarter, no question. But the stock stopped being a smart long-term investment long ago. Investors should always stay away from any stocks caught in a speculative bubble, and Tesla stock is no exception.
On the date of publication, Wayne Duggan held a long positions in GM.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.
