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In just a month’s time, Tesla share have fallen precipitously since the mid-September highs over $300 to the current $218. Markets certainly have taken a downturn in the last four weeks given the stubbornly high inflation numbers, the on-going geopolitical tensions (now also including OPEC) and increasing talk of recession. Tesla’s -39% decline however far exceeds that of the S&P’s -12% decline and the Nasdaq’s -14% decline. It was quite the eventful month for Tesla with certain data points (and distractions) impacting the share price.
Since the end of September in particular, the news-flow from the corporate front has been heavy despite the varying degrees of materiality:
September 30: AI Day 2022 – Tesla showcased prototypes of early humanoid robots which would be ideally used for repetitive or dangerous tasks currently performed by humans. Though Elon even mentioned that they are developing special batteries and actuators for them, he hopes that first customer deliveries could be achieved in 3-5 years (priced at below $20,000 per unit). More importantly, the latest updates were provided for Autopilot, Enhanced Autopilot and Full Self Driving (FSD). The demonstrations showed how the latest software versions trained via neural networks run from Tesla’s Dojo supercomputer were able to finally and much more accurately (and in real-time) auto-label items which come to light using vision only cameras. Much of the demonstrations exhibited how the autopilot improved driver assistance and allowed for an even more streamlined navigation experience with or without driver oversight. Though a firm timetable was not provided for when the FSD system can be 100% autonomous without any driver intervention, the second (most likely annual?) AI Day served as yet another powerful recruiting pitch to display the various cutting edge engineering initiatives going on with the intent to attract the best and the brightest. Note that the FSD beta now encompasses 160k drivers in North America, up from just 2k at this time last year. Though the Tesla Bot (aka Optimus) doesn’t quite serve Tesla’s mission to accelerate the world’s transition to sustainable energy, Elon did stress that it expands on Tesla’s mission to “make the future awesome”
October 2: Q3 deliveries – Tesla reported Q3/2022 deliveries of 343.8k, well ahead of the 255k deliveries from Q2/2022 however slightly below street expectations which were looking for closer to 365.0k. Tesla did mention that the deliveries were lower than they themselves expected due to external factors such as an increasingly challenging environment to secure transportation capacity at a reasonable cost during peak logistics weeks. This is temporary and not company-specific. Things are going well on the production front as production continues to recover from the Covid shutdowns in China – the Shanghai plant just completed a project to expand production capacity to 22k model 3 and Ys per week, while the newer plants in Berlin and Austin continue to ramp - both are expected to end the year at a run rate of 5k model 3s and Ys per week. Given that production has been inline with expectations and that the production ramps are occurring as planned, transport issues aside we see the company internals as positive and position the company well for a strong Q4 finish. Note that the shift to accelerated model Y production can ensure automotive gross margins which will likely be maintained near or above the industry leading 28%. We feel that the risk is on the upside for margin improvement given the production ramps currently underway. We also believe the negative reaction to the deliveries miss was a knee jerk reaction combined with profit taking post stock run-up from the August 4 3:1 stock split announcement.
October 4: Twitter Bid – Looking as if there was no viable exit from the previously announced Twitter (TWTR) takeover deal, Elon confirmed that he would proceed with the acquisition of the company at $54.20 per share (pending a successful debt financing and provided that the Delaware Chancery Court enters an immediate stay of the Twitter v. Musk case – trial set to begin on October 17). Though the $13.0B in debt financing is expected to be secured (expected but not guaranteed - note that financing conditions have worsened considerably since August), a large part of the $44.0B Twitter price tag now falls squarely on Elon’s Tesla shares. It is estimated that Elon currently holds approximately $20B of cash on hand from earlier Tesla stock sales in April and August. Additionally, a syndicate of investors has supposedly promised to contribute $7.0B in financing for the deal. The overhang is now on how many additional shares will need to be sold to conclude the transaction.
In short, after any announced plan for a stock split, Tesla shares have run up considerably leading up to the split date (+80% in the months leading to the August 2020, 5:1 split and +33% ahead of this past August’s 3:1 split) - see above. The run-ups have usually been followed with a post-split lull (flat performance) in the weeks following. The news-flow since the end of September can hardly be taken as the reason behind the nearly -24% decline to date. The internal fundamentals are strong given the 83,135 made-in-China Tesla vehicles sold in China during the month of September. This data was released on October 10th and is very positive. These sales numbers represent a new monthly high, surpassing the previous record of 78,906 vehicles sold in China this past June. The culprit for the underperformance has been due to the externalities involving the Twitter financing overhang. Given that Elon’s window to sell is a very narrow one, we would dare to estimate that the selling has been completed by now. Moreover, the risk is on the upside (even though unlikely) that the deal will yet fall through due to some legal technicality (whistleblower testimony, counter claims and notices of termination) or due to the syndicate of banks pulling out of the previously agreed upon debt financing agreement.
Lastly, (and sadly) this needs to be reiterated still: valuing Tesla solely on comps to the automotive industry is missing a large part of the story.
With an increasing revenue stream coming from software (via Autopilot and FSD), Tesla is more correlated these days to software companies given the growing SaaS-like recurring revenue streams which trickle straight to the bottom line. The correlations above speak for themselves and will likely become more pronounced in the years ahead.
We might be just a bit early but we think the selling is well overdone and likely to be already finished from Elon's part. There is a lot in terms of near-term Q4/2022 catalysts including the FSD Beta wide release, high volume 4680 battery production, a potential announcement for supercharger partnerships and potentially new announcements for 1 or 2 new giga factories. First up however is the Twitter vs Musk trial date on October 17 - this may be the timeframe the market is waiting for for the overhang to lift.