Sep 24, 2020
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Tesla Valuation Dropped $40 Billion In A Day. More To Come?

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HONG KONG CHINA – 2018/12/18: American electric company car Tesla Motors official store showroom. [+] LIGHTROCKET VIA GETTY IMAGES [9/8/2020] The Big Tesla Sell-Off Tesla s stock (NASDAQ: TSLA) fell 9% on Thursday to about $407 driven by a broader sell-off in technology and high-growth sectors. A large drop! For perspective Tesla lost $38 billion in value in a single day – that s greater than Ford s current market cap ($27 billion) and just under GM s market cap ($42 billion)

 

However Tesla s stock remains up by about 4. 5x year-to-date with a valuation of about $380 billion. That makes the company more valuable that Dow constituents which includes Procter & Gamble ($344 Bil) JP Morgan Chase ($309 Bil) UnitedHealth Group ($301 Bil) in addition S&P 500 constituents Mastercard ($344 Bil) NVIDIA ($321 Bil). However is Tesla fairly valued at current levels or is a recovery imminent? See our dashboard analysis Tesla Down -9% But Still More Valuable Than Procter & Gamble JP Morgan for more details on how Tesla compares with its peers with an identical market cap

 

Tesla s rally this year was driven by strong demand from China better than expected quarterly results and the company s recent stock split. Moreover investors are betting that the disruption attributable to the Coronavirus inside the automotive industry could make it harder for mainstream automakers to shift to electric vehicles giving Tesla a much wider lead

 

That said Tesla looks very richly valued with its P/E standing at over 230x in accordance with consensus projected 2020 earnings meaning that the company will have to execute all right to easily justify its current valuation not to mention drive further stock price gains. [8/13/2020] Planned Stock Split & China Sales Updates Tesla s (NASDAQ: TSLA) stock jumped 13% on Wednesday following the company s announcement of a five-for-one stock split

 

While the split doesn t change the fundamental picture for Tesla it does make the stock more accessible to smaller investors since the stock is up over 3. 5x year-to-date and currently trades at about $1 550. This could drive demand for the stock to a certain extent considering Tesla is a high profile name with a huge retail investor following

 

The split will go into effect on August 31. Separately Tesla continues to see strong deliveries in China with its Model 3 seeing 11k deliveries over the month of July driven by production at the company s Shanghai factory a growing supercharger network (4k Superchargers projected by the tip of the year) and lower starting prices which allow the vehicles to qualify for government subsidies

 

While July deliveries are below the roughly 15k deliveries the company saw in June the Model 3 remains the finest selling EV in China. Tesla is asking to boost sales further as it launches the Model Y compact SUV inside the country in 2021. PROMOTED Civic Nation BRANDVOICE | Paid Program
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No Putting A Person Of Color On Your Panel Doesn t Accomplish Diversity However rising trade and diplomatic tensions with China could prove a priority for Tesla s Chinese business

 

Under these circumstances is Nio – a premium Chinese EV start-up – an improved bet to play the Chinese EV market compared to Tesla? Discover more in our dashboard analysis How Does Nio Compare With Tesla? Otherwise searching for more the right way to outperform the wider market with less risk? Our Pershing-inspired portfolio in accordance with the contemplating Bill Ackman s firm Pershing Square offers a special risk-reward profile by combining growth performance and risk mitigation criteria

 

[7/23/2020] Soaring Emission Credit Sales Drive Tesla s Q2 Beat Tesla published Q2 2020 results on Wednesday posting a net income of $104 million – well ahead of consensus estimates that projected a small loss. So how did Tesla have the capacity to beat expectations by the sort of wide margin? Soaring regulatory credit sales were the first reason

 

The sale of regulatory credits rose to around $428 million in Q2 up from about $354 million in Q1 and just $111 million in Q2 2019. As these credits are almost pure profit (Tesla probably incurs no direct expenses to earn them) the company would most likely have reported a loss on a GAAP basis if it didn t recognize these revenues

 

Moreover we estimate that Tesla s Automotive Gross Margins would have been lower by over 600 basis points (6%) in Q2 2020 if not for these sales. So why are Tesla s emission credits sales soaring when its automotive deliveries grew by just 3% sequentially and are down by about 5% year-over-year? Firstly revenue recognition for these credits is incredibly lumpy and Tesla could sell vehicles in 1 / 4 and recognize revenue from related credits in future quarters

 

Secondly stronger demand for credits may be driving up the price. The European Union introduced more stringent emission norms this year requiring average Carbon Dioxide emissions per kilometer to drop to 95 grams from a median of over 120 grams in 2018 for passenger cars. Considering this automakers have to buy credits from clean vehicle manufacturers which includes Tesla with a view to avoid large fines for breaking these new emissions rules

 

Fiat Chrysler is a big customer for Tesla s credits – agreeing to purchase credits worth roughly $2 billion over 2020 and 2021. [1] To be sure this cash cow won t last for too long. Inside the medium- to long-term mainstream automotive companies will scale up their zero-emission vehicle sales reducing the have to buy credits from Tesla

 

However Tesla should continue to improve its margins and profits via higher software sales and battery improvements (related: A Detailed Look At How Tesla s Battery Costs Impact Its Gross Margins). Tesla s self-driving software upgrades which cost about $8 000 per vehicle currently are highly lucrative and we estimate that they contributed about 400 basis points (4%) to Tesla s Automotive Gross Margins of 21% in 2019

 

(See our analysis: How Do Tesla s Software Upgrades Impact Its Margins?) [5/1/2020] How Emission Credit Sales Helped Tesla s Q1 2020 Results Tesla posted a far better than expected set of Q1 2020 results despite the coronavirus pandemic with revenues growing by ~32% year-over-year and adjusted profits coming in at $227 million versus a loss of about $494 million a year ago

 

While the company benefited from strong deliveries of the Model 3 and a production ramp at its Shanghai factory much of the enhanced profitability came from higher sales of emission credits which soared to about $354 million from a median of about $150 million over the last four quarters. If not for the spike in regulatory credit sales Tesla would likely have barely broken even

 

Below we check out how sales of regulatory credits have helped Tesla and why we believe the near-term outlook for the company looks quite challenging. For more details at the outlook for Tesla s revenues view our dashboard analysis Tesla Revenues: How Does TSLA Make Money? What Are Regulatory Credits And How Do They Help Tesla? Several U

 

S. states and countries have Zero Emissions Vehicle regulations that require that clean vehicles account for a certain mix of car manufacturers sales each year. If automotive companies which still largely sell internal combustion engine-based vehicles don t meet these standards they are able to buy credits from the likes of Tesla that earn credits as they simply sell electric vehicles

 

Although the revenues from these credits are quite volatile they’re very lucrative for Tesla as it likely incurs no direct costs to earn them. The bump in these regulatory credit sales may be partly answerable for the company s automotive gross margins expanding 300 bps sequentially to 25. 5%. While it s possible that such credits could become more valuable inside the medium term as new emissions regulations come into play in Europe and states in the us look to enforce stricter norms the present collapse in global auto sales could hurt revenues from ZEV credits inside the near-term for Tesla

 

Outlook Remains Tough For Tesla In The Near-term Tesla is prone to face significant near-term revenue pressure and the company has put its 2020 guidance on hold using uncertainty surrounding the coronavirus pandemic and the wider economic recovery. There is little reason for folks to purchase expensive cars in the present day and Tesla s production at its Fremont facility which accounts for roughly three-quarters of its annual capacity remains suspended and there s no clarity as to when it could resume

 

However despite significant near-term headwinds the company s stock has continued to rally almost doubling year-to-date. The company trades at a P/S multiple of about 6x compared to GM which trades at about 0. 3x in accordance with trailing revenues. This means that the stock has significant valuation risk making it react more strongly to negative news compared to its peers

 

Our theme Autos Fight COVID-19 contrasts the performance of Tesla stock that’s up almost 90% YTD with mainstream automakers who’ve seen their stocks fall by about 40%. See all Trefis Price Estimates and Download Trefis Data here What s behind Trefis? See How It s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product R&D and Marketing Teams

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