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Tesla April 2024: AI Navigating a Cloudy Night

Updated: Apr 25

As promised in my previous post about Tesla, my predictions were on point with both the positive and negative Tesla has been facing. Now, let me provide a quick summary and analysis of what has been going on with Tesla since our last update.


Delivery Disappointments and Economic Headwinds

Tesla's Q1 2024 deliveries were a significant letdown, coming in at just a little near 387,000 vehicles compared to the average analysts' range of 414,000-511,000. This miss was surprising, as the lowest non Wall-street estimation by the reliable and well respected Troy Teslike at 409,000. The primary reasons for the disappointing delivery numbers appear to be intensifying competition in China and the ongoing impact of high interest rates on consumer purchasing decisions.

To fully understand Tesla's predicament, we need to examine the company's revenue breakdown. A whopping 47% of Tesla's revenue comes from the United States, while a significant 23% is generated in China. As competition in the Chinese market heats up, local rivals are engaging in aggressive price wars with Tesla, offering similar features at lower costs. Additionally, tech giant Xiaomi is entering the electric vehicle (EV) market with its own brand, further intensifying the competition.

Tesla's strategy of positioning itself as a premium EV brand may not be as effective in China as it has been elsewhere. Even though Tesla aims to maintain its status as a high-end player while cutting prices significantly in 2023, this approach seems not working well against profitable competitors like BYD as reported by CNBC. As mentioned in the previous article, I do not believe Tesla should engage in this price war in the first place. Starbucks has faced declining market share in China due to the rise of local competitors like Luckin Coffee that offer cheaper, more convenient options. Hence,when Tesla started the price war last year in the EV market, it proved to work well against the money-loosing EV makers but not effective in gaining market share from the more affordable Chinese brands. However, now that the Chinese government started many stimulus and subsidizes for their local companies to reach 5% GDP target, the next few years could be a challenging time for Tesla in China. The company will need to find a way to differentiate its offerings and justify its premium pricing in a rapidly evolving and increasingly competitive landscape.

On the other hand, Tesla's situation looks slightly better in the United States. There is a strong preference for locally manufactured vehicles, and anti-China sentiment is currently high. This could benefit Tesla, as it is a U.S.-based company with a significant domestic manufacturing presence. However, the ongoing trend of high interest rates is likely to continue dampening demand for expensive EVs across the board. This is reflected in the actions of legacy automakers, who are adjusting their strategies to focus more on hybrids and less on pure electric vehicles. For example,  Ford recently delayed plan for EV push and is instead focusing on expanding its hybrid lineup to compete more directly with Toyota. This shift in strategy suggests that even traditional automakers recognize the impact of high interest rates on the affordability of EVs.


Robotaxi Drama and the $25k Model Delay


On April 5, Reuter reported that three sources claimed the low-cost $25,000 vehicle model, which was originally planned for introduction in June 2025 and ramp-up in 2026, has been indefinitely cancelled. A fourth person told Reuters that Tesla has shifted its focus to developing robotaxis. Elon Musk quickly responded on X, formerly Twitter, without specifying which parts of the Reuters report he disputes, claiming the information is false. He later announced that robotaxis will be unveiled on August 8, 2024.


Elon refuted Reuter on X

Picture: Elon refuted Reuter. Source: X

This development raises several questions about Tesla's near-term product roadmap and long-term strategic priorities. The cancellation or lowering of priority of the $25,000 model, if true, would be a significant blow to Tesla's aspirations of making electric vehicles (EVs) more affordable and accessible to the masses. It would also be a stark reminder of Tesla's history of missing self-imposed deadlines (e.g FSD) and overpromising on new product launches (e.g also FSD). Combined with the delays and uncertainty surrounding the construction of Gigafactories in Mexico and India, which are largely due to the absence of local battery manufacturing capabilities, it seems increasingly likely that Tesla will face further production and delivery delays for its more affordable models. I believe it's plausible that the $25,000 model could be delayed until at least 2027, if not later. This would mirror the pattern set by the Cybertruck, which was announced in 2019 with a promised delivery in 2021 but ultimately began deliveries in 2024.


Regarding the shift towards robotaxis, while Tesla's Full Self-Driving (FSD) technology has been impressive, I share the skepticism expressed by many Tesla watchers about the viability of autonomous taxis as a major revenue stream in the near term. The regulatory hurdles, safety concerns, and public acceptance issues surrounding fully autonomous vehicles are extremely significant and underestimated by Elon Musk. Even with Tesla's lead in FSD, it is not guaranteed that they will not face pushed back for adoption even if Tesla's FSD operates perfectly. Tesla predecessors in robotaxi are Waymo and Cruise. Waymo was allowed to test in San Francisco since 2018 and it was only until 2023 that they were allowed to operate 24/7. Yet, with one high-profile accident in 2024 involving a Cruise robotaxi, the widespread backlash led to a people putting the vehicle of Waymo on fire and the increase in scrutiny over autonomous driving.


Tesla's recent actions and public statements suggest a growing opposition on the current leading government, which led to many open lawsuits from the government over the few years targeting both the company, its CEO and its closed-relationship companies. Elon Musk's public attacks on the Biden administration and his denying courtship of Republican former President and 2024 Presidential candidates Donald Trump raise concerns about Tesla's ability to navigate the complex and often politicized world of automotive regulations. Given that Democrats are more likely to buy an EV than Republican (83% vs 29%), Musk's aggressive political manoeuvring could potentially harm Tesla's sales and market position in the medium to long-term.


Turning to the potential for Tesla to pivot towards software-based revenue streams for resuming revenue growth, this seems like a risky and uncertain strategy. While software is undoubtedly a key differentiator for Tesla and Elon hinted at licensing FSD to other manufacturers on X, the intense competition from both established automakers and emerging tech companies is likely to erode Tesla's advantage over time. Ford's CEO has publicly acknowledged the challenge of competing with Tesla's software, leading the company to invest heavily in building its own in-house capabilities. Nvidia, a major player in the AI space, has also formed partnerships with Tesla's competitors in China like BYD and Xiaomi, further complicating the landscape. Even if Tesla could successfully license its FSD software to other car manufacturers, it's unclear what margins and pricing power the company could maintain in a highly competitive market. The dream of achieving a 90% market share with a 90% gross profit margin for autonomous driving software seems increasingly unrealistic as more players enter the fray.


The Positives: Don't Count Tesla Out


Now, since we discussed the negative sides, let's shed some positive lights to balance our views. Firstly, there is the famous argument about the aging of Model S and Model X compared to the yearly updated version of other brands. If we look closer to the specific features and major upgrades each iteration of those brands, it is clear why this point should be strongly disagreed and debunked. This is rather a choice of little upgrade per iteration or a major update every few years. While this may not be the standard approach for some competitors, it allows Tesla to focus its resources on developing groundbreaking new technologies and refining its existing product lines. Let's look at the Toyota Corolla for example. While Apple CarPlay was introduced in 2014, it takes Toyota nearly 9 years to include CarPlay into the 2023 model and barely any changes were made to the vehicle line from 2015 to 2019.


Charging network is also a significant moat of Tesla. Tesla's Supercharger network remains the unrivalled world's largest, most reliable, and fastest-growing. It creates a significant competitive moat and alleviates a key consumer pain point, while also generating a reliable stream of revenue growth with more adaption. In fact, nearly all biggest automakers around the world have adopted Tesla's charging standard. With more adoption of both EV and hybrid vehicles, the opportunities to generate revenue for Tesla will increase. As the electric vehicle market matures, having a robust and expansive charging infrastructure will become even more critical for attracting and retaining customers.


The heavy investment into Gigafactories around the world are going to pay dividend. As mentioned in my previous article, Tesla is the modern Toyota in terms of factory efficiency. Gigafactories streamline production immensely. While costly to build initially, they now grant Tesla an edge over others in terms of output and scaling potential. By vertically integrating manufacturing and optimizing its supply chain, Tesla has been able to achieve economies of scale that its competitors struggle to match. This gives the company a significant advantage in terms of cost and profitability as the EV market grows.


Last but certainly not least, the wild card for Tesla is its CEO, Elon Musk. As mentioned in my past publication about Palantir and the acceptance of eccentric CEOs, as an investor in Tesla, we have to get used to Elon Musk's polarizing personality and lack of attention to one company at a time. While he is a remarkable and arguably the one of the best CEOs of this generation, his outspoken personality often causes significant impact on the Tesla brand, both positively and negatively. Musk's unpredictable public statements and tweets can create both opportunities and challenges for Tesla. On the one hand, his bold vision and charismatic leadership can attract attention and inspire enthusiasm among customers and investors. On the other hand, his impulsive behaviour and tendency to provoke controversy can damage the company's reputation and create uncertainty.


Moreover, we often forget how interconnected Elon's companies are with each other. As the first patient of Neuralink was successfully operated and played chess online with mere thought, there is hope for a far future where those patients can drive a car. Of course, the first car that can have full integration support for those patients would be Tesla, since both companies are owned by Elon Musk. This highlights the potential for synergies between Tesla and Musk's other ventures, which could create new opportunities and give Tesla a competitive edge in the long-term. Another example is the updated 2025 luxury Roadster model, where a team of SpaceX engineers collaborated to help boost the acceleration of the vehicle. This cross-pollination of talent and expertise between Tesla's different divisions, all under Musk's guidance, showcases the company's potential for innovation and its ability to push the boundaries in many spaces.

Stock Prediction: Realistic Expectations


A thinking monkey

Picture: A Thinking Monkey. Source: Unsplash


Warning: this is not financial advise, I am simply providing my own opinion and laying out my plan for my current Tesla stocks. Please note that my ideal price for Tesla stock is only applicable until further information given in the next couple (from now to October/November 2024) earning reports.


At 165 USD per share, Tesla is currently trading at 55 forward PE with analysts predicting a 22% EPS growth rate, meaning a 2.5 PEG ratio, which is a fair ratio for me for Tesla. This valuation takes into account Tesla's recent price hikes and stabilization, as well as the company's projected business growth in the coming years. Tesla also seems to have successfully stopped the price decrease with many rounds of price hike in recent months, which will be taken into account of all 3 scenarios, as well as Tesla's other business growth as mentioned in the previous articles. This price stability is a positive sign for investors, indicating that the market has found a more accurate valuation for the company. Also, I priced in some FSD value depending the scenarios and not Robotaxi, as mentioned above. I believe that FSD, despite facing competition from other tech companies, will continue to be a major revenue driver for Tesla in the near future.


  • Bear case (30% chance):

Bear says "Hi"
  • Picture: Bear says "Hi". Source: Unsplash

    • In this scenario, a few catalysts would occur:

      • Tesla mega bulls lost faith in the stock in the near term.

      • Confirmation that the 25k model is delayed until at least 2027

      • Only 1-2 FED rate cut in 2024 with job report stays strong and inflation trending at mid 3% and high 2% likes the first 3 months of 2024

      • The robotaxi demo in August 8 will be a major disappointment

      • Commodities price likes lithium increases likes the last 2 months (while I was right that the price would collapse at least 50% since my first post)

      • Chinese competitors growing aggression in both China and Europe

      • Tesla continues to be attacked by the government regardless of who win the election in 2024 as mentioned above

      • FSD price drop due to competition from the likes of Nvidia.

    • These factors will result in a significant decrease in net margin in 2024 and a slow recovery in 2025. Hence, I believed the estimated average EPS growth rate for the next 3 years in this case is 18%, meaning Tesla is trading at 67.22 future PE, or a 3.73 PEG. This valuation suggests that the stock could experience a substantial decline if these bearish scenarios play out. This means Tesla stock could collapse as much as 88 dollars (2 PEG) before recovering to my fair ratio at 101-115 USD (2.3 PEG - 2.6 PEG).

  • Neutral case (45%):

    • For this case to happen, we would need:

      • Tesla mega bulls holding out strong and keep buying the dip during the difficult 2024

      • 2-3 FED rate cut in 2024 and 3 or more in 2025 with not as strong labour reports and inflation dropping on track from April 2024

      • Robotaxi Event meets expectation, no more no less.

      • Chinese competitors not able to grab much market share as they planned outside of China due to negative global sentiment in Europe and North America

      • The US government stops attack on Tesla due to worry of competition from the Chinese brands.

      • Cyber truck ramp and demand in 2024 and 2025 will be significant

    • This scenario assumes that the market will eventually recognize Tesla's strong position and potential, leading to a more stable stock price. In this case, I believe the average EPS growth rate for the next 3 years is 24%, meaning the stock is already near a fair price range between 181-204 USD. This suggests that the stock is currently trading at a level that reflects its fundamentals and growth prospects.

  • Bullish case (15%):

A Bull

  • Picture: A bull head. Source: Unsplash

    • This would require all of the neutral case conditions, and many more favourable factors such as:

      • The adoption of EV in North America ramps up close to the European countries likes Norway

      • The US government turns to support Tesla in competition with China

      • Robotaxi Event shows more promise than initially thought

      • FSD price remains at 12k USD despite of competition, 199 USD/month with 10-20% adoption rate; OR

      • The conversion rate of FSD for new purchase increases (sat at 7% in Q3 2022, a drop from the mid 40% in 2019) recovers to the 20-30% range as FSD price drop <= 50%.

      • FSD was able to license to at least 1 major legacy automaker

      • The cyber truck ramping is done by the end of 2024 and demand was significant enough to make an impact pulling up the demand for other models (halo effect)

      • The 25k model will be introduced in late of 2025 and ramp up in 2026. Since it should be much easier to ramp a compacted vehicle than the cyber truck while interest rate should be at the low 3% by the end of 2026, I am expecting it to deliver a more significant revenue impact in 2026 than the cyber truck in 2025.

    • These factors, along with a favourable regulatory environment and continued technological leadership, will drive Tesla's growth and stock performance in the bullish case. As you might have observed, it is heavily relied on the success of FSD and other bets to materialize this scenario. In this case, the average EPS growth should return to 30%, meaning TSLA is trading at 40 forward PE, or a 1.34 PEG ratio. This valuation suggests significant upside potential, with the stock trading at a level that reflects its strong growth prospects. This means there is an upside to jump to 281-318 USD by the end of 2024.


Conclusion


With all that being mentioned, I am curious to know what you think.

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