Introduction
Since its inception in 2003, Tesla, Inc. (:NASDAQ:) has navigated a rocky and unstable path of innovation, production challenges, and volatile market dynamics. This Electric Vehicle (EV) manufacturer has evolved into the top player in the autonomous automotive industry, driven by its ambition to expand global electric vehicle ownership and become the leader in autonomous transportation. My goal here will be to layout Tesla’s financial journey from IPO onwards, focusing on key events as well as concerning trends relating to multiple financial metrics including: Operating Cash Flows (CFO), Capital Expenditures (CapEx), Financing Activities, and Cash Balances. I will examine the various roles of these elements their historical impact to Tesla’s aggressive growth strategies, as well as bringing focus to the concerning financial trends which may be hinting towards the failure of the company; particularly due to its over reliance on government subsidies, low interest debt issuance, capital venture, and shareholders to support it during times of financial stress.
2009: Laying the Groundwork Leading to Initial Public Offering:
2010-2013: Scaling Production and Financial Instability:
The years from 2010 to 2013 were characterized by substantial fluctuations in Tesla’s financial performance. In 2010, Tesla went public at $17 a share, raising over $226 million during its initial public offering (IPO). By 2012, the Model S was finally launched after years of development going back all the way to 2007. This generated significant revenue, doubling from $204 million in 2011 to $413 million in 2012, but Operating Cash Flow remained deep in the negative capping in at -$264 million along with the additional hindrance of rising CapEx, which hit $239 million as it expanded the manufacturing capabilities of its Fremont facility.
This focus on investment into expansion would continue into 2013 when they announced that European residents would be getting ample access to superchargers by the end of the year as Tesla began to ramp up their new assembly line in Tilburg, Nederland with the objective of boosting European production of Model-S and Model X models. This obviously led to 2013 being yet another year of high CapEx, which capped at -$239 million, though for the first time, the expenditures were offset by higher Operating Cash Flow of $265 million, thus achieving the first ever positive year of FCF, clocking in at $1 million thanks to rising sales volumes. During this period, Tesla succeeded in raising more funds, this time in the form of convertible bond offering totaling over $1 billion in Q2, 2013. In total, Tesla had managed to accumulate a Cash Balance of $849 million by the end of the year, mainly attributed to the debt issuance raising more capital, thus further illustrating the high costs associated with scaling production and R&D within the company.
2014-2017: The Road to Profitability:
2018-2019: Setting the Stage for Profitability and Production:
2020-2023: Breakthroughs and Market Turbulence:
The year 2020 marked a significant milestone for Tesla, as it produced and delivered nearly half a million vehicles. The operating cash flow soared to $5.9 billion, while CapEx rose to $3.1 billion; mainly driven by investments into Gigafactory Shanghai and ongoing construction of Gigafactory Berlin and Texas. It was during this period that Tesla would take majority market share in gross margin starting at 17% in 2017 and topping out at around 26% of the world’s gross margin by 2022, surpassing the likes of CATL, BYD, and the Major incumbent carmakers which include: BMW, Ford, GM, Honda, Hyundai, Kia, Mercedes-Benz, Nissan, Renault (EPA:), Stellantis (NYSE:), Toyota, and Volkswagen (ETR:).
Source: IEA
During this time, Tesla’s stock performance was on a major winning streak rising from about $113 a share in 2020, all the way to the ATH of $1,243.49 a share by the end of 2021. This rise aligns with the sudden boost in venture capital within the sector during those years, as seen in this chart provided by the IEA:
Source: IEA
Source: Author
Source: Author
As seen above TSLA is trending towards a dangerously unstable Cash Flow situation where this percentage is about to go below 100% for the first time since 2018 which if left unchecked could lead to much of the progress the company has made over the years being completely wiped out. In the past TSLA has relied on venture capital, low interest loans, and debt issuance to bail it out of these situations, but during this time of rising interest rates, a shrinking supply of available lenders, falling venture investing activity, rising shipping rates, and last but not least, the rebound of inflation which has led to a rise and revival of the rare earth metals as evident by this chart of the rare earth metals price index:
Source: marketvector.com
This rise in rare earth pricing will likely lead to even higher CapEx spend in the future and is likely to drag down not only TSLA but other auto manufactures too such as Ford, who has been going through its own struggles with supply and shipping issues that I’v already covered in detail in my previous coverage of Ford Motors. As for ways of potentially investing into rare earth metals, my stock of choice is SQM, which I also recently covered in detail.
A crucial aspect of Tesla’s growth narrative is its shift in focus from high-end consumers to a broader market. Initially, Tesla targeted affluent buyers with premium-priced vehicles like the Model S and Model X, which often had price tags exceeding $70,000. This strategy positioned Tesla as a luxury automaker and established a reputation for performance and sustainability.
However, as the market evolved, Tesla recognized the importance of catering to average consumers. The launch of the Model 3, price starting at around $35,000, aimed to attract a broader demographic, making electric vehicles more accessible. This strategic pivot was essential for driving production volumes and solidifying Tesla’s status as a mass-market player.
Summary & Economic Projections
The latest data points to a troubling shift in Tesla’s cash flow dynamics, particularly with the recent narrowing of the gap between Operating Cash Flows and Capital Expenditures. This has led to Free Cash Flow plummeting from $8.5 billion in 2022 to just $1.72 billion over the Trailing Twelve Month period as of Q2, 2024. These issues, combined with the rising costs of raw materials, rising competitive pressures, and falling investor interest, threatens to undo much of the progress the company’s made over the years.
Tesla’s reliance on venture capital, debt issuance, and government incentives has been crucial during times of financial distress. However, with rising interest rates, constrained lending, and the advent of rising rare earth metals prices that will serve to drive up production costs, the company’s ability to navigate future headwinds based on previous trends, appear limited.
Given the above concerns, it is in my opinion that shares of TSLA at the current price of $217.80 are extremely overvalued with a Trailing Twelve Month P/E of 61.18 at an EPS of $3.56 which puts share of Tesla at a worse value than 90.12% of the industry of 982 companies where the median ratio sits at a 15.95 Trailing P/E meaning that TSLA Shares are currently trading at a price about 4x above the industry median which could lead to severe declines in the case of a mean reversion potentially to around $56 per share would put it within fair P/E valuations.
Source: GuruFocus
The company’s ability to finance its debts has come to a major crawl as of 2021, with very little growth seen in the year of 2023:
Source: macrotrends.net
This inability to find willing lenders to finance debts with has come in alignment with the accelerating trend of declining EBITDA, falling from the high of $17.40 billion in Q4, 2022 to the current low of $11.60 billion as of the Q2, 2024 report representing about a 65% earnings decline in just the last few quarters:
Source: macrotrends.net
This has also had a very negative on net margins, declining from 31.50% in Q4, 2023, to flatlining to approximately 5.5% in the previous two Quarterly Reports in 2024 putting it even below the lows of 2023:
Source: TradingView.com
These deteriorating earnings, along with the rising costs and the absence of the financing crutch that the company has relied on so much in the past, lead me to believe we will see the stock trade back down closer to valuation metrics. As I mentioned earlier I project it would be likely for TSLA to trade closer to the P/E of the Industry Median of 15.95 which would put it at about 56 dollars a share currently; this would be a better case scenario assuming the company is able to turn things around, but at a worst case scenario I think it could trade towards Book Value. The current Price to Book (P/B) sits at 10.47 meaning that it’s trading about 10x above the market value of its Assets. This shows that the market is pricing in future growth, however this is well above many of it’s competitors which primarily sit at a ratio below 1x:
Source: GuruFocus
If the TSLA truly were to go into liquidation and have all aspects of future growth priced out we would likely see shares of the stock decline 8-10x which could place the stock at about $20 a share which would bring the marketcap down to around $69 billion, if this were to happen I speculate that a bigger automaker such as Toyota (:TM), who is more established within the industry may look to acquire Tesla’s assets and IP at a discount to book.
Technical Outlook
Given that we are talking on such a macro level it is only fitting that we measure price-action on the log scale chart:
Source: TradingView.com
The above chart a log scale 5-Wave AB=CD structure that terminates approximately at the 4.272 extension around $343, TSLA has already faced one rejection from this level and bounced off of one of the previous support/resistance zones which are marked in green. It has since tried to stage a rally above the zone, perhaps to test out the previous top, but has so far failed to get any meaningful momentum and looks to be staging a 3rd lower high. If the price action continues this trend into the end of the month, we will have a confirmed Bearish Engulfing Candle on the 1-month timeframe. This would act as a strong bearish confirmation and increase the likelihood of price coming down towards the nearby support around $101 again, if this happens it will confirm the bear trend and likely result in the support breaking. From then on, there would not be any real support until it reaches the zones between $32 and $10, which would be in alignment with the projections made based off the financial valuation metrics I’v reviewed today.
This content was originally published on Gurufocus.com
