Shares of EV giant Tesla (NASDAQ:TSLA) dropped roughly 10% of their value after reporting weak earnings last week. Revenue narrowly beat estimates, but its earnings per share missed expectations by a massive margin. Earnings have been buffed up by CO2 regulatory credits, a far-removed profit center from its core business. Moreover, management failed to provide a concrete performance forecast for this year. Coupled with its meteoric valuation, TSLA stock looks highly unattractive at this time.
Despite the recent dip in its price, TSLA stock price metrics are still mind-boggling. For instance, its forward price-to-sales figure is more than 896% higher than the sector average. Moreover, its forward price-to-book value is also more than 718% higher than the sector average. The company’s fundamentals hardly justify its massive valuation, and according to consensus estimates, it is trading at a 30% premium. The difference between its high and low estimates is more than 22% higher than the Feb. 2 price. Hence, with such an overblown valuation, it’s tough to get excited about it at this point.
TSLA Stock Earnings Review
Tesla recently reported its fourth-quarter results, which disappointed one and all. Though revenue came in better than expected, its EPS of an adjusted 80 cents was roughly 29% lower than analyst estimates.
Surprisingly Tesla energy and its services segments were the bright spots in the quarter. The apparent progress in its net income is mainly due to selling regulatory credits. The figure is at $1.58 billion, almost three times the $594 million total in 2019.
The company’s delivery numbers stand at 499,550 vehicles for the year, just shy of its guidance of half a million. Adjusted sales prices for its vehicles suffered due to the price cuts. Hence, gross margins came in at 19.2%, which were its lowest since the final quarter of 2019.
Other expenses for the company also rose sequentially. It reported $90 million in stock-based compensation, despite a $23 million reduction in Elon Musk’s reward package. Hence, the quarter’s operating income was down by more than $200 million sequentially.
Perhaps what was more disconcerting was the management’s forecast for this year. They did not provide formal guidance, stating the long-term goal is to expand deliveries by more than 50%. Investors were looking for a concrete target for total deliveries.
All in all, the company’s fourth-quarter results left a lot to be desired and paint a gloomy picture about its near future.
The Impact of Regulatory Credits
Regulatory credits have played a significant role in boosting profitability for Tesla in the past few quarters.
In the U.S., individual states typically award these credits to automotive companies to encourage production of electric vehicles. These credits can be purchased and sold. And, if a company is unable to sell enough EVs, they can buy these credits from other automakers.
The windfall resulting from these credits helped subsidize the loss-making operations of Tesla so far. Since it only produces EVs, the company can sell a whole bunch of credits to other automakers.
However, at this point, it’s tough to imagine how this situation might last for the foreseeable future, considering how several automakers are investing in their EV competencies. As soon as they start ramping up EV sales, the windfall will vanish and have a considerable impact on Tesla’s top and bottom-line.
Final Word on Tesla Shares
Tesla is in a spot of bother as it progresses this year. The company’s valuation is far-removed from the reality of its weak fundamentals. Tesla is testing investors’ patience with its lackluster profitability numbers and a vague outlook regarding its delivery targets. Regulatory credits will not last for long, and the company seriously needs to work on its path to profitability. Therefore, steer clear of TSLA stock for now.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.