Believe it or not, I actually don’t really care about this quarter. In fact, I don’t care about ANY quarter on its own.
So Tesla pulled some levers and juiced its numbers. Lots of companies do that. But what companies can’t do is alter the core economics of their business, and here’s where Tesla falls down.
Tesla is an industrial company that makes cars and batteries (and now plans to offer ride sharing, which, you know, makes so much money for Uber(Private:UBER)…). My view is that cars and batteries generate roughly the same EBIT margins at around 10-12%.
I’ve already modeled this out, and here’s the key: even with massive growth, immediate free cash flow, and higher-than-guided production of its current models, Tesla’s shares are overvalued.
For this reason, it doesn’t matter if it is profitable. In fact, I expect the company will be (at some point). The key is that as a car company, Tesla will never earn huge returns. Cars are a cyclical, highly capital intensive, and unattractive industry. TSLA continues to face competition from competitors who have more resources, and who know they’re behind, and can easily imitate Tesla’s strategy and whittle away any excess returns it has yet to generate.
For the record, I have never disputed that Tesla makes a great product. They’re slick, fast, sexy vehicles, and people love them. I think Elon Musk is humanity’s best hope to colonize mars, and to advance the human race into a more sustainable way of living. That does not mean, however, that one should fall in love with Musk, with Tesla, or with ANY stock for that matter.
What matters is the present value of free cash flow a business generates over its life, and based on the information we have now, Tesla is a long way from justifying its value on that basis.