- (TSLA) stock’s strong first-quarter 2022 earnings amid global supply chain issues and chip shortages
- Fighting inflationary impact on costs with product pricing is a major risk
- The company has matured but there are a lot of things yet to be done and valuation remains a key concern
Tesla (NASDAQ:TSLA) stock, a premium electric vehicles manufacturer that operates in two segments, Automotive, and Energy Generation and Storage, has reported its financial results for the first quarter of 2022, beating analysts’ expectations on the top and bottom lines. Is TSLA stock a Buy now? Despite this very strong quarter, I remain with my previous bearish thesis. Let me elaborate more on this.
The first reaction was positive as shares of Tesla rallied initially after the news on April 20, but the rally was short-lived. If better than expected results were not enough to set a lasting new uptrend for TSLA stock, what other catalysts could be supportive now? One explanation is the broader volatility in the stock market amid concerns that the Federal Reserve will implement a more aggressive interest rate increase of 50 basis points at the next FOMC meeting.
Another explanation has to do with Elon Musk and his decision to buy Twitter (NYSE:TWTR) and make it a private company. Investors are worried that the focus on Musk may not be entirely on Tesla now and this may be bad news as Tesla has been built entirely around Elon Musk and his personality. Is it time to focus more on the true fundamentals and valuation of TLSA stock rather than just Musk? I argue that this concept should hold for every stock. The management is very important, but the actual products, values, and financial performance of the companies should be reflected in their stock prices.
| TSLA | Tesla | $844.50 |
Strong Quarter Signals Tesla Continues Doing Things Right Now
Beating estimates on both top and bottom lines is not an easy thing and when it is done by a company in the market capitalization of Tesla, it is highly positive and supportive for its stock.
Tesla in Q1 2022 did that by reporting EPS of $3.22 versus $2.26 expected and revenue of $18.76 billion compared to $17.80 billion expected. The company in its Q1 2022 update stated that “The first quarter of 2022 was another record quarter for Tesla by several measures such as revenues, vehicle deliveries, operating profit, and an operating margin of over 19%.”
The record automotive margins of 32.9% are a milestone achieved and the revenue growth was attributable to primarily two key factors, an increase in the number of cars delivered, and an increase in average sales price. For the first quarter of 2022, Tesla delivered 310,048 vehicles, compared to 308,600 vehicle deliveries in Q4 2021.
CFO Zachary Kirkhorn stated that “Production is resuming at limited levels, and we’re working to get back to full production as quickly as possible,” which makes us wonder what the actual figures for Tesla in the events that there were no global supply chains, chip shortages and a lockdown in the factory in China. I see however a major risk for Tesla that is to be monitored closely over the next quarters.
TSLA Stock Raising Prices Could Be Good for Inflation, But Bad for Sales
Tesla has increased the prices for its vehicles for its entire range which is good news for revenue and potentially bad news for future sales.
An increase of 5%-10% is not negligible. In the event of a 10% increase, Tesla has found an effective way to beat the inflation rate in the U.S and cover the costs related to raw materials and logistics. It is a highly risky move though.
A few years ago, Tesla was a synonym for electric cars and especially premium ones. Today there are many other premium electric vehicles manufacturers with a plethora of models in production and many more coming up over the next quarters and years. It is hard to believe that an increase of 10% or even 5% leaves prospective buyers of Tesla models indifferent.
It could be the case a few years ago but today every detail in the automotive industry matters. Take for example Mercedes-Benz which launched its EQS SUV model recently. It has already an EQC SUV model, but it offered another premium model at a lower price to target consumers that may not want to spend as much to get the more expensive and larger in dimensions EQC model.
I strongly believe that now Tesla faces increased competition from other premium electric vehicles manufacturers and losing sales as a result of these price increases is a likely scenario. Time will tell whether I am correct or not on this.
The Bottom Line
Tesla has matured a lot over the past decade and is considered a leader in the electric vehicles planning a stock split that does not affect its stock price other than psychological ones, making its stock price cheaper. The plans to conquer the world with its electric vehicles will not be easy. India for example is a major market in the automotive industry and has stated it will not let Tesla import cars from China to sell them in its local market. Instead, Tesla should build a new factory in India if it wishes so to help India by creating more jobs. I admit it is a smart move by India.
Tesla should invest more in quality being a premium EV manufacturer. In early February 2022, the company recalled more than a half million vehicles in the U.S. market.
In the end, TSLA stock remains very expensive. It has a price / sales (FWD) ratio of 10.53, a price / book (FWD) ratio of 21.94, and a P/E GAAP (FWD) ratio of 81.74. The Consumer Discretionary Sector has median values of P/E GAAP (FWD), price / sales (FWD), and price / book (FWD) ratios of 13.87, 0.95, and 2.46 respectively.
Buying shares of Tesla now is a very risky story. From a valuation perspective, they are very expensive. It does not make much sense to buy TSLA stock shy of $1,000 even if it is considered a pioneer and a leader in electric vehicles. The competition is catching up very quickly. The supply chain constraints that are likely to continue through 2022 pose another challenge as well.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
