It’s heresy to the true believers, but Tesla might be just another car company

This week another nail was driven into Tesla’s bubble of hope when it reported its first-quarter sales numbers, and they were disappointing, if not deeply so.

Tesla encountered a (thus far) rare setback with its first-quarter deliveries in 2024, marking the company’s first annual decline in quarterly deliveries since 2020 and falling well short of Wall Street’s forecasts. Picture: AFP

Wow. Talk about playing the man and not the ball! Perhaps some of the most vitriolic feedback I have encountered has come from those who have chosen to write to me explaining how wrong I am about Tesla possibly being just another car company.

They’re as staunchly convinced about the company’s prospects as they are about its products.

By way of one publishable example, a reader wrote: “(Tesla) is the most misunderstood company in the world. It is so much more than a car company … This will 10-bag in the next decade and people will have their aha moment.”

My argument about Tesla, which I promoted back in September when the company’s share price was 66 per cent higher than today’s, is that the earnings multiple wasn’t justified by the company’s ageing product line, its struggles in key markets like China, price discounting, a distracted CEO, shifting strategies, and an overreliance on existing models.

I concluded back in September: “If Tesla does indeed become ‘just a car company’, the sharp drop in PE will continue and reflect a growing realisation in Tesla’s growth prospects, its position in the auto industry, and that its economics are less exciting than once believed.”

That sharp drop in the PE multiple has come to pass.

Importantly, I am not saying those moonshots won’t succeed, but investors who are betting on them succeeding need to understand the difference between hope and investing in demonstrated success. Anyone betting on something as ephemeral as “they’re much more than a car company” must know when hope drives the share price rather than demonstrated earnings power.

Even now, after significant share price declines since I wrote about the company’s inflated prices in September, the company’s PE multiple of 40 times (probably thanks to its rusted-on fan base) is, among car manufacturers globally, only exceeded by Ferrari. For that PE multiple to be maintained, the ‘‘moonshots’’ everyone keeps pointing me to, which include robotics, AI and battery storage, have to deliver.

If they don’t, then Tesla could be just a car manufacturer with a PE ratio that compares unfavourably to many equally reputable and profitable car manufacturers on single and very low double-digit PE ratios.

This week another nail was driven into Tesla’s bubble of hope. Tesla reported its first-quarter sales numbers, and they were disappointing, if not deeply so.

Tesla encountered a (thus far) rare setback with its first-quarter deliveries in 2024, marking the company’s first annual decline in quarterly deliveries since 2020 and falling well short of Wall Street’s forecasts.

Tesla delivered 386,810 vehicles globally in the first three months of 2024, down 8.5 per cent on a year earlier. It was also the lowest number of vehicles delivered in the past five quarters, and even though the company sold more EVs than China’s BYD, the data reflects a broader downturn in EV sales generally.

This is something I have been warning about for some time. The world’s entire car fleet cannot become entirely electric using currently available technology.

Today’s upstream supply chain, after-sales support and infrastructure make that dream impossible. It might be one of the reasons Toyota’s former CEO suggested at best just a third of the world’s car fleet would be fully electric.

The disparity between production and deliveries suggests that the issue is not only Tesla’s but industry-wide. Notwithstanding sabotage at one of its plants, Tesla produced 433,371 vehicles in the quarter – many more than it delivered, hinting at muted demand.

At the very least, today’s muted consumer enthusiasm for the electric transition has resulted in a slowdown in sales growth, which must also produce a recalibration of investment plans by all supply chain participants. That means range anxiety and resale prices will remain valid concerns for a while yet, producing continued agnosticism towards EVs.

Tesla’s most recent delivery figures led to a 5 per cent drop in Tesla’s shares, contributing to a now 33 per cent decline, year to date. Tesla shares are now one of the worst-performing in the S&P 500 over that time frame. Many will tell me that it’s a rare ‘‘value’’ opportunity, but that’s only true if the shares trade at or below intrinsic value, which must be lower than the current price.

Meanwhile, the global electric vehicle market is still growing, and that’s to be expected when coming off a low base and with new manufacturers adding options for consumers to consider. The global electric vehicle market expanded by 35 per cent, year over year, in the first quarter. Tesla, however, is facing stiffening competition from major incumbents such as VW, Volvo, Mercedes and BMW, and also from Chinese EV-dedicated manufacturers like BYD, which reported a 13 per cent increase in vehicle sales.

Tesla’s ageing product line and higher interest rates pose additional challenges, with the company warning of significantly lower growth in 2024. This will force the company into a strategic reassessment. For example, Tesla has already revealed it aims to boost its software revenue through initiatives such as a one-month free trial of its “Full Self-Driving Capability” package, normally costing $US12,000 outright or $US199 a month.

Tesla is preparing to announce its first-quarter financial results on April 23. Expectations are for a slight revenue increase and a quarterly profit of $US1.8bn, the latter representing a 27 per cent fall from the same time last year.

This is arguably a reflection of discounting to boost sales, without which volumes could be materially lower.

New technology has often improved consumers’ quality of life. The same cannot be said for investors’ wallets.

Roger Montgomery is the founder and chief investment officer of Montgomery Investment Management.