Again in 2020, EV automaker Tesla (Nasdaq: TSLA) and its CEO Elon Musk had been on high of the world.
TSLA’s share costs had been surging increased and better. Musk’s tweets had been making every day headlines. And the corporate’s Mannequin 3 was shortly turning into one of many hottest automobiles in America.
However even at TSLA’s peak, Musk knew precisely how fragile his firm’s future was.
In a now-famous interview, Musk defined that traders had been keen to pay such excessive costs for TSLA shares as a result of they anticipated future earnings would make it worthwhile.
“If, at any level, they conclude that’s not going to occur, our inventory will instantly get crushed like a soufflé beneath a sledgehammer!” Musk ominously went on to say.
Effectively, it looks as if the day of the sledgehammer might have lastly arrived.
In yesterday’s earnings report, the mega-cap market darling introduced that automotive income declined by 7% year-over-year. Earnings had been down by 42%!
And diving deeper into the report solely yields extra unhealthy information:
Annual fee of gross sales development fell from a peak of 73% in Q2 2022 to 10%.
Annual fee of earnings development fell from 678% in Q1 2022 to fifteen%.
Gross revenue margin (as a proportion) fell from 32% to 22%.
Working margins have been slashed by greater than half, from 17% in Q1 ’23 to 7.8% presently.
Present Earnings per share (EPS) is 54% decrease than the identical quarter a yr in the past.
This could be extraordinarily tough information for any firm to take care of…
However after final yr’s huge run-up in “Magnificent Seven” shares, TSLA’s valuation is stratospheric. The corporate is presently promoting at an eye-watering 69.2 P/E ratio.
Meaning right now’s TSLA traders are paying an especially steep premium for shares of a enterprise that’s now in fast decline.
You’ll be able to see that decline mirrored within the firm’s Inexperienced Zone Energy Score too:
(Click on right here for Inexperienced Zone Energy Score)
This is essential information for YOU, even in the event you’re not a TSLA shareholder.
As a result of TSLA is a serious part of the S&P 500, it accounts for practically 2% of the index by weight, making it the sixth largest inventory within the index.
Meaning in the event you personal any shares of index funds or ETFs that monitor the index, then you definately’re not directly a TSLA shareholder.
And TSLA can be the standard-bearer for the continuing EV mega development. The place TSLA goes, different EV producers will quickly comply with.
So right now, we’re diving in deep to see whether or not this newest information is only a short-term “breakdown” or if TSLA is now a “lemon” …
A Reckoning Lengthy Overdue for Tesla
Longtime readers will know I’ve by no means been shy about sharing my ideas on TSLA and Elon Musk.
I give Elon credit score for doing one thing nobody else had performed earlier than him.
He lastly made electrical automobiles cool.
Nevertheless it was at all times apparent to me that the logistical difficulties of the EV enterprise would ultimately meet up with Musk’s large desires and greater superstar enchantment.
I’ll be the primary to confess — it was irritating to observe TSLA preserve its sky-high share costs after I knew {that a} disappointment just like the one we acquired yesterday was … inevitable.
However within the immortal phrases of John Maynard Keynes, “Markets can stay irrational longer than you’ll be able to stay solvent.”
Certainly, it looks as if TSLA has been caught up in each main investing “zeitgeist” over the previous couple of years.
From photo voltaic roofs to self-driving automobiles to accepting bitcoin as cost, Musk did a masterful job of protecting his firm’s identify within the headlines (although few of those initiatives ever make it to market).
However nothing lasts ceaselessly.
Historic inventory market research have discovered that fortunes can shift quickly. The most effective-performing shares of the final decade nearly by no means turn into the best-performing shares of this decade.
That’s as a result of the market is at all times evolving and adapting to new international “themes,” one thing the chart beneath from Visible Capitalist captures completely:
This actually helps put TSLA right into a “large image” context.
Buyers believed EV investing can be one of many main themes for the market this decade, so that they had been keen to pay a premium to spend money on a market chief.
However now that Tesla’s shortcomings have gotten clearer and clearer, we will count on to see some sledgehammer-and- soufflé motion within the close to future…
Adapt to Thrive and Multiply Your Wealth
TSLA’s present woes are half of a bigger transformation we’re starting to see within the inventory market.
With inflation retreating and the Federal Reserve now on monitor to slash rates of interest, traders are scrambling to take earnings on mega-cap “Magnificent Seven” shares.
They usually’re re-investing that money into an entire new vary of alternatives … alternatives which have been largely ignored these previous two years.
I recorded a particular video presentation overlaying all the small print of this rising development — together with how you should use it to multiply your portfolio over the following few years. You’ll be able to watch it HERE.
To good earnings,
Adam O’Dell
Chief Funding Strategist, Cash & Markets
