CES 2020, held last week, coincided with Tesla (TSLA) - Get Report shares hitting all-time highs right around the $500 mark after a 10% or so run during that week alone. This left many rival automakers presenting at CES scratching their heads, given the many issues they see facing Tesla. Of course, some of this may just be sour grapes, but other observations seem to reflect legitimate issues the automaker must address. (Full disclosure: I am short Tesla shares)
Based on informal discussions I had with many mid-to-high level executives at some of Tesla's large automotive rivals, here are the top questions they had:
No. 1 : Why are investors paying up for Tesla when its revenue growth has stalled?
Tesla’s most recently reported quarter, Q3 2019, was very poor from a growth perspective. Revenue were down 8% year-over-year, and profit was down 54%. For Q4 2019, which Tesla hasn’t reported yet, analysts expect revenue similar to last year’s $7.2 billion. Maybe there will be an improvement on the bottom line, or maybe not. The point is that Tesla used to be a growth company, and perhaps it will become one yet again in 2020, but recently it has not been growing. So why are investors paying such a huge multiple for what is a no-growth story for now?
No. 2: Don’t investors see the looming competition in electric cars?
There are approximately 200 battery-electric vehicle (BEV) models on their way to showrooms between now and the end of 2023. Because of government quotas and emissions laws, these cars essentially have to be sold below cost. If all you sell are BEVs -- Tesla, obviously -- then you will be competing against products where the companies are forced to sell below cost. That’s a disaster for margins, especially if the only cars you are selling are BEVs.
No. 3: How is Tesla able to keep promising “full self-driving” and “Robotaxis?”
In Oct. 2016, Elon Musk promised that every Tesla made from that point onwards would be software-upgradeable to Level 5 driverless capability: "Basic news is that all cars exiting the factory have hardware necessary for Level 5 Autonomy so that’s in terms of Cameras, Compute Power, it’s in every car we make on the order of 2,000 cars a week are shipping now with Level 5 literally meaning hardware capable of full self-driving for driver-less capability.”
How can a company take payment for a product on which it does not deliver during the lifespan of a three-year lease? It’s been over three years now, and if this had been any other company, the Federal Trade Commission (FTC) would have forced the company to refund its customers, and perhaps even buy back the whole product.
No. 4: Why aren’t regulators calling for an end to Tesla’s “Autopilot” functionality?
Whether it’s what Tesla calls, or has called, “Autopilot” or “Full self driving” or some variant thereof, it has become abundantly clear that consumers either misunderstand the product, or deliberately mis-use it. Musk himself even went on 60 Minutes with Leslie Stahl in 2018 and drove a Tesla without his hands on the wheel.
Tesla cars have been involved in many more accidents than what caused investigations into Audi in the 1980s and Toyota a little over a decade ago, in terms of alleged unintended acceleration. And yet, the authorities, especially in the U.S., have gone very gentle on Tesla in comparison to how they treated far smaller issues by other automakers, the executives told me.
Bottom line: Automaker executives see many issues about Tesla that the market appears to be ignoring for now.
Overall, these car company executives have a hard time connecting Tesla’s relative lack of growth with its valuation. Per Insideevs, which most people think have the best estimates of Tesla’s U.S. sales numbers, Tesla sold 192,250 cars in the U.S. in 2019. That’s up by only a fraction of one percent from 2018, when it sold 191,687 cars in the U.S.
In a flat overall U.S. new car sales market of 17 million units both in 2018 and 2019, that means Tesla’s market share held constant at approximately 1.1% in both years. Combine that with the lousiest of net margins, and auto executives are puzzled by how a company beset with all of these risks and issues should be valued more than almost every other automaker in the world.
At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.