Tesla: Still Bearish Even After A Rough 2022

Last February, I wrote an article comparing Tesla (NASDAQ:TSLA) and PACCAR (PCAR) and explained why I thought PACCAR was a better investment in the trucking industry than Tesla. At the time, shares of PACCAR were just above $90, and Tesla was trading at around $300 per share. I talked about the absurd valuation of Tesla and its $953B market cap at the time. While everyone is entitled to their own opinion, I am surprised by the frequency of the bullish articles on Tesla. There have been 15 bullish articles since the start of January alone. Tesla shares are down over 50% since my article, and I still think further downside is possible.

Investment Thesis

Tesla is still too expensive, even after the massive selloff from the peak. With shares trading at a P/E near 33x, we have ways to go when comparing to other auto manufacturers. CEO, Elon Musk, has been busy in 2022 with the Twitter acquisition, but Tesla could struggle in 2023 for several reasons. An economic slowdown might spell trouble for the business, which has been in the news recently for price cuts in Asia.

The biggest red flag for the stock is the massive insider selling, which has been going on for years. As far as the future for electric vehicles goes, I remain in the skeptic camp. We simply don’t have the commodities necessary to build enough batteries, and if we did, our current power grid wouldn’t be able to handle it. If you still hold shares, I would consider selling because I think it’s only a matter of time before they go below $100 and possibly much lower.

Twitter and Other Current Events

While my opinion on Tesla hasn’t changed since my last article, there are several other developments worth mentioning. The economy has continued to struggle, which is not a good sign for an auto manufacturer. Revenue growth has continued in 2022, but I have also seen news articles on price cuts for Tesla models (here and here). Some think that the price cuts are a reason to be bullish, including permabull Dan Ives, but I fall in the skeptical camp that price cuts will be a net positive for the company. While these things are bound to have an impact on Tesla’s business, the most obvious thing involving Elon Musk in 2022 was the acquisition of Twitter.

I’m not going to spend much time on the Twitter acquisition, which is a rabbit hole that I will be avoiding here for several reasons. I have seen several people express their frustration with Musk’s distraction with other ventures when he should be focused on Tesla. At the end of the day, it’s his company and his money, so most investors are just along for the ride. While Musk was considered a visionary by many a couple of years ago, public opinion on him seems to be changing. While current events related to Tesla and its mercurial CEO are worth keeping an eye on, I don’t think they are red flags for bullish investors. The biggest red flag for me is the massive insider selling at Tesla.

Insider Selling

While the insider selling at Tesla is no secret, it provides a strong counterpoint to any bullish thesis. The insider sales paint an ugly picture that might be just as bad (but slightly different) as Meta Platforms (META) in 2021, a year when Zuckerberg sold over $4B as the company bought back over $40B of stock in 2021. I considered Tesla overvalued in my last article, where I pointed out some of the problems with Tesla’s stock, including insider selling.

In a risk-off period where interest rates are likely to increase, shares have a significant downside from the current price. I’m also not a huge fan of what I have seen over the last year with rampant insider selling and the compensation structure for the company. The incentives are tied to revenue and there have been several lawsuits against the company for the CEO incentive structure, the going private circus, and even racial discrimination.

The picture above shows Musk’s sales in 2022, who has been dumping stock for years, but the pace shown in the picture above is alarming, in my opinion. While Musk has a huge ownership stake, the fact that he has sold well over $10B in the last year alone is reason enough to be cautious. Plenty of other insiders have been selling stock as well. There haven’t been any insider buys since the start of 2021 (for obvious reasons, in my humble opinion). With the valuation where it was in 2021 and 2022, I would be selling too.

Valuation

In the last year, Tesla’s sky-high valuation finally caught up with it. As the market went from risk-on to risk-off, the shares are down more than 60% from the November 2021 peak above $400. With a market cap of $421B, I still think Tesla is overvalued, but the valuation isn’t nearly as egregious as it was when the market cap was over $1T. If you look at estimates, the valuation is still rich today, despite a massive drop in share price over the last year.

Normally, I’m reluctant to shrink the time horizon on FastGraphs for articles, but I decided to make an exception in this case. Above is a graph showing the share price compared to the normal valuation starting at the beginning of 2021. Any longer just shows a ridiculous normal P/E, and the typically useful visualization tool isn’t much help. I would take these estimates with a grain of salt, but a 32.7x P/E for a car company isn’t nearly as ridiculous as a P/E over 100x like it was in 2021. I have my doubts about earnings growth approaching 30% over the next couple of years, but we will see how things pan out for the company.

My Two Cents on Electric Vehicles

To be perfectly honest, I’m not sure if there is any price I would be interested in buying shares. I prefer an old-fashioned internal combustion engine with a manual gearbox to an electric car (and yes, I have driven one before). I also think we are going to see significant problems with the commodities required to create the batteries for electric vehicles. Over the next decade, demand for electric vehicles is projected to skyrocket. This is in part due to government meddling with incentives and subsidies. I have yet to see how we are going to have the copper, lithium, nickel, cobalt, and other materials required to switch the majority of cars to electric.

The batteries, the lithium batteries for all the cars, all the greens, I’m antagonistic to the green crowd at this point. I’m a resource depletion hawk, I’m an environmentalist, all that, but the guys that are buying the electric cars thinking they’re really good. All of the cobalt being mined is being mined by slave labor in the Congo. A buck a day, 20,000 kids and young adults in the bottom of this big open pit mine, smacking away with mallets, picking up cobalt by hand. And we have to come up with 10 times as much cobalt from what we can do now. We have to increase the output enormously. I don’t think the world has the resources to electrify the way people think we are going to electrify.

– Dave Collum on the Jay Martin Show

He is one of several people that have pointed out the lack of supply in commodities to create the batteries necessary to make a huge number of electric cars. I’m open to ideas, but I have yet to see anyone explain how we get enough commodities out of the ground (an extremely destructive process for the environment, by the way) to build the number of electric cars to meet demand. We also have a power grid that will not be able to handle the increased load unless we magically build a bunch of nuclear plants in the next decade. As the push for electric vehicles continues, I think we will see more signs of trouble, especially for those paying attention. We got a preview in California, where they had blackouts in the same week they announced they would ban the sale of gas-powered vehicle sales after 2035.

Conclusion

If we fast-forward five or ten years, I think Tesla will be remembered as one of the main bubble stocks of the post-COVID stock market boom. I don’t know where the business will be by 2030, but I doubt we will see a return of the absurd valuation we saw in 2021. CEO, Elon Musk, has certainly had a busy year with his acquisition of Twitter, but there are several reasons I see to avoid Tesla stock. They have had price cuts in Asia, and I think the economic environment could spell trouble for the business.

The biggest and most obvious red flag is the insider selling (which has been going on for years). While the valuation isn’t as bubbly as it was, it’s hard to call it cheap today. If you believe estimates, the P/E sits at 32.7x, which is rich for a car company. While I won’t be buying an electric vehicle, I have a hard time seeing how we will get the commodities necessary to satisfy the demand for those that plan to in the future. We are also going to create problems for our electric grid if we don’t make significant changes, but we will see how far the push for electric vehicles goes before running out of steam.

I still think prudent investors should avoid Tesla, and my guess is that we head below $100 at some point. I leave the short-term price moves up to the chart people, but as far as valuation, I would rather be a seller of shares here than a buyer. If Tesla manages to become the dominant car company, and we have a way to get the commodities we need for batteries, and technology improves, then I might be wrong. I just think there are too many questions to answer, which is why I would avoid Tesla stock.