Tesla tumbles as Musk fumbles, but there’s a silver lining (NASDAQ: TSLA)

Intro: Musk Fumbles, Tesla Tumbles

Tesla, Inc. (NASDAQ: TSLA) shares plummet following its AI Day 2.0 Event, as it seems that announcements around the humanoid bot “Optimus” failed to appease investors. Moreover, the negative impact of Tesla Q3 Delivery miss and Elon’s Decision to complete his Twitter (TWTR) buyout for the originally agreed price of $44 billion ($54.20 per share) is hurting the stock.

While I think Musk winding down the Twitter drama removes a surplus from Tesla stock, Elon may have to sell more of his Tesla holdings to raise cash for the Twitter acquisition in the coming weeks. And Musk’s sales (or the traders leading his new sales) may have been behind Tesla’s underperformance against the Nasdaq-100 (QQQ) over the past few days. In my mind, Elon is overpaying Twitter by about 2 to 2.5 times (fair value: $20), and Tesla shareholders are paying for his escape.

Another potential driver of this rapid decline in Tesla stock is the lack of deliveries in the third quarter. Last week, Tesla released its production and delivery data for the third quarter of 2022, which saw the company set new records.

Although Tesla hit new production and delivery records, the number of deliveries of 343.8,000 missed Wall Street [FactSet] estimates of 371K. A shortfall of around 7% raising eyebrows is more than enough to stoke investor concerns about demand in a lackluster macro environment. In the press release, Tesla management blamed the missed delivery on logistical issues, meaning demand isn’t the issue here (not yet, anyway).

Now, for long-term investors, the Twitter drama and missed Q3 deliveries are just short-term noise. The silver lining here is that Tesla stock is catching up to fair value, providing long-term investors with a reasonable entry point. We discussed Tesla’s valuation in June, as well as its business fundamentals. In this note, I’ll share an updated valuation for Tesla, then review its technical chart and quantitative factor data.

Silver Lining: TSLA nears fair value

Tesla is a unique company with no real comparables in the market, so we have to assess it on an absolute basis. To do this, we will use the TQI evaluation model. According to Elon, Tesla could increase its electric vehicle volumes by 50% per year for years to come; however, achieving this lofty goal would require flawless execution and no external hitches. Looking at Tesla’s progress in Berlin and the Texas Gigafactory, it’s fair to assume that ramping up production isn’t as simple as it looks on paper. For 2022, Tesla is expected to produce 1.4 million vehicles (495,000 in Q4, ~40,000 units per week). And in 2023, Tesla’s production estimate is 2.1 million, which would reflect about 50% year-over-year growth.

Beyond 2023, Tesla’s revenue growth rates are expected to slow significantly, but I believe these projections are too low given EV penetration levels, Tesla’s aggressive expansion plans, and the immense potential of new business sectors. While I don’t expect Tesla to sustain 50% CAGR growth over the next five years, I see rapid growth for the company.

Plus, Tesla offers solid (and improving) profit margins and generates tons of free cash flow. Here is my assessment for Tesla:

According to my analysis, the intrinsic value of Tesla is around $214 per share, i.e. it is always overvalued by ~12%. Over the next decade, Tesla’s stock price could grow at a CAGR of 17.54%, which fails to beat my 20% investment rate for high-growth stocks. Therefore, I would not buy more Tesla at its current levels. That said, we have a 2% position in Tesla within TQI’s Moonshot growth portfolio in my market department, and we’re patiently waiting for a drop to the low 200s to add more and into the mid 100s to carry our position at 4%.

Why wait for these levels? The answer is in the technical table.

A worrying technical configuration

As of this writing, Tesla is trading at ~$240 and trying to form a base at this level after a rapid decline; however, the title remains stuck in a descending wedge pattern. From a technical standpoint, Tesla is looking to retest its 2022 lows of around $209 (a level last seen in May), which is very close to my estimate of fair value for the company.

If Tesla fails to hold the $200 psychological support level, we could see a rapid descent into the $175-$150 range. I’ve discussed the idea of ​​inverse gamma compression at Tesla in the past, and such a move could come to fruition in the event of a deep economic downturn hurting consumer demand for Tesla’s products in a competitive environment. growing in the EV market (yes, the competition comes in the form of traditional automakers and other EV startups).

On the other hand, if Tesla can break out of the falling wedge pattern, we could see a run to new all-time highs ($400+) in 2023. While it’s hard to see such a move in the foreseeable future due to the increasing likelihood of a recession, the market is unpredictable and Tesla has one of the strongest earnings growth stories in the market.

If I had to make a directional bet, it would be down, and here is my reasoning for this somewhat bearish position on Tesla.

Slowing growth could lead to lower trading multiples

After more than 18 months of stagnation in the stock, I no longer view Tesla as ridiculously overvalued as I have in the past. However, Tesla’s trading multiples (price to earnings ratio: 87x, forward price to earnings ratio: 52x and price to FCF ratio: 119x) are still quite high.

Today, Tesla’s leadership position in the rapidly growing electric vehicle market (combined with the potential for self-driving, energy storage, insurance, humanoid robot and other potential revenue streams) justifies higher valuation. However, a rapidly changing macroeconomic landscape may impact Tesla’s trading multiples.

The past ten to fifteen years could be considered an era of free money (due to extremely loose monetary policy), and Tesla stock soared after the FED implemented a ZIRP environment in start of the COVID-19 pandemic. As interest rates rise, asset prices have moderated across the board. And Tesla is not immune to this valuation reset. As financial conditions tighten further (liquidity evaporates), Tesla stock could reset lower (as so many other growth names have done). That’s why I maintain a cautious outlook for Tesla shares in the short to medium term.

My fellow SA authors and Seeking Alpha’s quantitative rating system seem to agree with my analysis, as Tesla is rated by consensus “Hold”. While Wall Street analysts have a “Buy” rating on Tesla, I believe that rating will follow the price drop in due course.

Final Thoughts

Tesla’s stock is rapidly approaching its fair value, and given current market conditions, it could very well outrun the downside. Patience is key to building wealth in the stock market, and Tesla’s technical and quantitative data is more than compelling evidence to deter investors from deploying new capital into this meter at current levels. For those looking to invest in Tesla for the long term, the low 200s seem like a reasonable (and very doable) entry point.

Takeaway key: I value Tesla ‘Hold’ at $240 per share.

As always, thanks for reading and happy investing. Feel free to share your questions, concerns or thoughts in the comments section below.