TSLA Enters Bear Market – Are Investors Finally Realizing The True Lack Of Growth?
Fri, 07/24/2020 – 08:17
Tesla shares are slumping early on Friday morning, two days after the company reported yet another “profitable” quarter helped along by a massive sale of over $400 million in regulatory credits.
In fact, TSLA is now down over 21% from its recent record highs, officially entering a bear market in many investors’ minds…
And Robinhooders are surging in as the price tumbles…
It seemed like yet another story of Tesla playing with its numbers – whether it be regulatory credits, A/R or warranty reserves – to turn a profit during a quarter when it most certainly shouldn’t have. We outlined Tesla’s results in this full report and also noted analyst Gordon Johnson’s analysis of how Tesla posted the numbers it did here.
But after this quarter – and especially after CFO Zach Kirkhorn said on the company’s conference call that Tesla would not be selling nearly as many regulatory credits next quarter, it appears that focus could actually be turning to the company’s auto sales growth. And if that’s the case, look out below.
Amidst all the bluster about expanding Gigafactories and the narrative of saving the world, there remains the core issue of whether or not Tesla plans on ever making money selling cars. As we noted in our earnings writeup, Tesla’s sales growth has been about as impressive as its net income ex-regulatory credit sales. That is to say, not impressive at all.
A new Bloomberg opinion piece published by Chris Bryant the day after Tesla’s earnings also seems to begrudgingly (and finally) address the issue of sales growth. It called the company’s $104 million of net income a “modest amount” for a company that trades at 800x its trailing earnings. Modest, we would argue, is an understatement.
The piece then hones in on the fact that these regulatory credit sales can not, and will not, last forever:
The profits are also more than accounted for by $1 billion of regulatory credits that Tesla sold to other carmakers during the 12 months to June, including $428 million in the latest quarter. It’s only able to earn this income because rivals haven’t gotten their act together yet on building enough electric vehicles and have to buy credits from Musk’s company to satisfy emissions regulators. Tesla acknowledges this good fortune won’t last forever.
The op-ed piece calls for a renewed look at Tesla’s revenue growth – which isn’t really growth at all. In fact, what we noted earlier this week is that for a company that is valued more than most other automakers in the world combined on its prospective growth, and is larger than both the entire US and European auto sector, one would expect revenue to actually, well, grow at some point?
Bryant seems to realize that these chickens could soon be coming home to roost. So far, in the second quarter, we have seen nothing but Tesla slashing demand – of both its Model 3 in China and its Model Y. This would indicate to use that the automaker may once again be having issues getting vehicles out the door. Here is a snapshot of Tesla’s total production and deliveries over the last 5 quarters, also showing unimpressive growth:
“Tesla isn’t growing all that much right now, which is hard to square with the massive jump in its share price. Revenue declined 5% year on year in the latest quarter. The pandemic will have taken a toll, but Tesla will only really start to merit its ‘Big Tech’ valuation once its top line starts firing again,” the op-ed concludes.
Remind us to explain gamma squeezes to Bloomberg one of these days; maybe we can unravel the mystery of Tesla’s “massive jump” in its share price.
Regardless, if Tesla is, in fact, having a demand problem – and regulatory credits dry up in Q2 while the financial mainstream starts to realize the ridiculous nature of the company’s valuation – we could see a sharp move closer to reality, which for Tesla shares is probably closer to double digits than all time highs.