EV fears turn real on big Tesla miss on Q1 deliveries

What comes next?

The big question is what happens to Tesla from here. Many retail investors are long Tesla shares from a higher level.

If we start with valuation, then Tesla is priced at 29x operating income over the next 12 months. For comparison, BYD is valued at 5.8x operating income over the same period. To make the relative valuation more odd, BYD is expected to grow revenue 25% this year compared to Tesla at only 10% growth. US equities generally trade at a steep premium to all other markets, but it is clear that the market is reluctant to invest in Chinese companies while maintaining very lofty expectations for Tesla.

Another way of figuring out some yardstick for Tesla is by looking at Toyota. If assume Tesla ends up at the same market share (roughly 10%) and gets to the same operating margin, then the EV business is roughly worth $350bn compared to the current market value of Tesla at $531bn. Of course, Tesla has its energy business and there are other real options embedded in its valuation.

Two things will be crucial for Tesla going forward. The growth in EVs will continue for decades to come, but it is the global market share in EVs that will be the key factor to monitor for investors. The other important factor is Tesla’s return on invested capital which is roughly around 10% and much better than anyone else in the industry. But if Tesla, due to competition, sees its ROIC going down to the industry average then that is another risk factor to consider for investors.

A lesson in expectations, Nvidia investors pay attention

Tesla shares are down around 60% from its highs in late 2021 and it is an important lesson for investors in expectations. There are company results and then expectations set by investors in the equity market. Shares move around when expectations change.

In late 2021, Tesla had a market value of around $1.1trn, revenue of $54bn and EBITDA of $10bn. The share price was priced for a very high global market share in the future of well over 25% eclipsing the current 10% market share of Toyota, the biggest carmaker in the world. Fast forward to today and the share price is down 60% while revenue is at $97bn and EBITDA is at $13.6bn. For newcomers to the equity market this seems odd. How can the stock price be lower when revenue has doubled and operation profit expanded by 36%?

Because expectations today are very different from those in late 2021. Back then expectations did not accurately reflect the coming EV competition, especially from Chinese EV makers, and the impact on interest rates from inflation.

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