GELYY - Tesla's Stock Price Depends On Full Self-Driving - That Is Not Possible Yet

2023-06-21 09:35:59 ET

Summary

• Tesla, Inc.'s market cap relies on solving the autonomous driving issue, which is difficult in the near future.
• Tesla stock is currently overvalued despite the company's popularity and technological advancements.
• There are insufficient reasons to justify the high price of Tesla's stock at the moment.

Elon Musk recently said that Tesla, Inc.'s ( TSLA ) market cap depends on the company's ability to solve the autonomous driving, or full self-driving ("FSD"), problem. But, unfortunately, this problem is hard to solve in the near future. As I have mentioned before and will show again below, TSLA stock is overvalued. Although it is a popular and technologically advanced company, there are not enough reasons to pay so much for the company's stock right now. But let me explain the reasons behind this.

Tesla's autonomous driving

Elon Musk once again confirmed his vision of Tesla's admirers buying full self-driving vehicles. But truth be told, this idea is not new at all. Earlier on, he said this dream would come true by 2020 . Three years have already passed since that target date, but autonomous cars are still not massively sold. Moreover, no finished self-driving car has been introduced by the corporation to the curious public just yet. But once again Musk has said that Tesla is about to solve the autonomous driving problem. Yet, the corporation’s cars only provide advanced driver assistance features. So, "autonomous" Teslas require full supervision from drivers - hardly FSD.

This additional feature costs the drivers $15 000 . And some Tesla owners are disappointed and ask for a refund. At the same time, Tesla's CEO has been promising full self-driving cars since 2016 when he predicted that Tesla would send a car from Los Angeles to New York City without human input by the following year. So, at the very least, we can see that this problem is technically much more complicated than many enthusiasts had hoped.

But even if Tesla really comes up with a fully autonomous vehicle, it does not mean it will be a commercial success straight away. The research and development costs are very high. Meanwhile, the demand might not be exceptionally high. A lot depends on the company's ability to market and launch this new model. Not to mention that another company might come up with a self-driving car earlier than Tesla. Chinese companies, including BYD Company Limited ( BYDDF ) and Geely Automobile Holdings ( GELYF ), are also famous for their technological innovations. That means that Elon Musk's company might suddenly lose its first-mover advantage.

The point I am making is that too many speculations and risks are involved here. That is why I think it is not the best idea to buy TSLA stock in the hope Elon Musk's company could suddenly introduce autonomous cars. But self-driving vehicles are not the only speculation on the top of Tesla's investors' minds.

Other Tesla ideas

Sure, Tesla is not just a pure electric vehicle ("EV") company. There are many areas it operates in, and Tesla gets revenue from these sources. Some analysts also predict these areas will generate much more money in the future. But there is still too much guesswork to be done. But here are a few ideas that might "work."

Earlier on, I also wrote about Tesla's revenue sources, other than EVs.

As you can see from the table above, energy generation and storage sales, as well as services and other revenues, keep rising. But they make up quite a small proportion of the company's total sales. We cannot accurately predict if and when they will generate very high net profits for Tesla. Anyway, let us look at the corporation's popular ideas .

Solar Roofs

This is a roofing system that can harness solar energy to power homes. These are designed to look like regular roof tiles, but they are actually made of solar panels. So, this does not just look aesthetically better but it also protects the house roof and generates energy.

Energy storage innovations

I wrote about this feature offered by Tesla earlier on. The EV maker sells solar energy storage systems, known as Tesla Powerwall . We know that there is still no massive production of these systems, but these seem to have very good long-term growth potential. Because even in Southern countries there is no 24/7 and 365 days per year sunny weather. So, storing this energy is crucial. As can be seen from the excerpt above, Tesla's energy generation and storage revenue growth rate is quite high, not like the total automotive sales. But still, energy generation and storage sales make up only a small proportion of Tesla's revenues. So, at the moment these are not strongly affecting the company's overall financial results. But these could indeed contribute to the corporation's success in the future.

The Tesla Megapack

This is a large battery that can store up to 3 MWh of energy. That is sufficient to power a small city for a day. The Megapack can be used to store energy from both solar and wind farms. If the company manages to monetize it just like its EVs, it would be a huge success, indeed.

Supercharger Network

Tesla has built a network of high-speed chargers across the U.S. to enable Tesla drivers to recharge their cars. However, these charging stations are still not available everywhere. So, there is some growth potential here, too.

Tesla Gigafactories

These factories were made to mass-produce the lithium-ion batteries used in Tesla's electric cars. But Gigafactories also produce solar panels and other components for Tesla's products. This is quite practical and gives Tesla the opportunity to be self-sufficient. However, this does not provide much profit growth potential.

Although Tesla's innovative ideas seem to be great on their own, there is still lots of guesswork to be done to say whether they will generate lots of cash. Although Tesla's non-EV departments grow well, they only make up a small proportion of the company's sales.

Valuation

I have mentioned many times before that Tesla's valuations are ridiculously high. True, there were periods in Tesla's history when the valuation multipliers were even higher. But still, they are over and above the S&P 500 averages .

For example, as of the time of writing, Tesla's price-to-sales (P/S) ratio is near the x10.5 mark, whilst that of the S&P 500 (SP500) is equivalent to about x2.5, more than 4 times the average, that is.

Tesla's P/E ratio is also extremely high, currently lingering around the x77 mark. The S&P 500's average, meanwhile, is x25.5, also more than 3 lower than that of Tesla.

Tesla's price-to-cash flow (P/CF) ratio is ridiculously high as well. A "good" price-to-free cash flow (P/FCF) ratio should ideally be below 10 . Tesla's P/FCF ratio is 156.

Tesla's price-to-book (P/B) ratio is also excessive, currently lingering at around 17, too much above the S&P 500's average of just over 4.

So, overall TSLA stock is overvalued.

TSLA stock - risks

The risks are obvious, in my view. If a stock is overvalued, it cannot stay so forever. In other words, " markets are a voting machine, investing is a weighing machine " as Colin Graham, a multi-asset investor, says (and first said by namesake Benjamin Graham). In my opinion, this is true of Tesla.

Some of my readers have reproached me for being bearish on Tesla. It does look like my analysis was inaccurate because the stock price did not fall immediately after some of my previous articles had been published. Sure, a popular asset rally can last for a while. But most of Tesla's valuations are due to the great expectations the company would come up with a fully autonomous vehicle and would start making tons of money from its other projects. But ironically you are asked to pay a very high price in advance for something that may never come true. But the optimism is absolutely extraordinary.

Certainly, Tesla is not headed for bankruptcy. It will not go out of business even if there is a long recession. However, EV sales are already not very good. I wrote earlier that the company had to reduce its electric vehicle prices many times this year alone. But if there is a further economic downturn, the company's revenues and therefore profits will highly likely decline. Not to mention the assets' valuations, including the overvalued TSLA stock, would fall.

Risks to my thesis

I could indeed be very wrong about my skepticism of Tesla. Some of my readers criticized me for being bearish on TSLA when the stock price "just keeps going up." Many poor investment strategies "work" in the near term, no question. Do not get me wrong. Tesla is a very popular and technologically advanced company. There is quite a risk that many long-term investors and speculators would ignore the fact the stock is overvalued for a long time. I mean this is a big risk for short-sellers. It is also possible for Tesla's management to announce some interesting news, like their first self-driving car. Some other technological breakthroughs are also very possible. It is also possible for Tesla to sufficiently increase its net profit margins thanks to the massive production of energy storage systems. Not to mention the long-awaited recession may not come in the near future, which will be a great positive for all stocks, including TSLA.

Conclusion

Although Tesla is a highly innovative company led by Elon Musk, its charismatic CEO, there are plenty of speculations about its future inventions and financial success. TSLA stock is trading at extremely high valuations, whilst some of its long-awaited achievements are simply not there. I understand why the stock price keeps rising. Indeed, it is popular and investors hope to see some great announcements. But I would not personally buy Tesla's stock at such sky-high valuations based on the speculation the company will come up with a long-awaited self-driving car.

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