Tesla Stock: AI Optimism Seems Overblown

1 week ago

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Introduction

I person been covering Tesla, Inc. (NASDAQ:TSLA) banal present connected Seeking Alpha since October 2021 and my conclusions person fluctuated betwixt "buy" and "sell," coming to antagonistic conclusions the past 4 times. The information is piling up, the institution is reporting its caller results and firm actions, the macro is flowing, and truthful I consciousness it indispensable to stock accusation with you that mightiness beryllium hard to find elsewhere.

For example, those who travel the institution regularly cognize that analysts astatine Morgan Stanley (MS) precocious issued a study successful which Adam Jonas et al. upgraded the banal to "Overweight" and raised their terms nonsubjective from $250 to $400, giving TSLA further momentum successful the market.

The main statement for the upgrade was the caller Dojo system, which analysts judge should adhd arsenic overmuch arsenic $500 billion to TSLA's marketplace successful the foreseeable future.

Morgan Stanley [September 2023 - proprietary source]

Well, I invitation you to instrumentality a look with maine astatine the premises underlying the analysts' assumptions and determine for yourself however adjacent they look to beryllium to reality.

Tesla's Dojo And Its Impacts

First off, let's specify Dojo. It is simply a machine hardware and bundle strategy that is intended to process immense amounts of information and bid AI algorithms rapidly and efficiently, helping Tesla amended the capabilities of its Autopilot and Full Self-Driving (FSD) systems.

Morgan Stanley wrote Dojo could prevention Tesla astir $6.5 cardinal by FY2024, but this is unverified due to the fact that of the aboriginal signifier of Dojo's rollout, MS admits. The strategy could besides accelerate the monetization of conveyance software, starring to higher revenues. Network Services could scope $335 cardinal by FY2040, representing a important information of Tesla's earnings, driven by fleet licensing and accrued gross per user. The worth of Dojo is besides linked to Tesla Mobility robotaxis and the 3rd Party Battery Business.

In galore ways, the estimates that influenced Morgan Stanley's upgrade came from the firm's forecasts, not from the bank's ain projections.

The Morgan Stanley survey repeatedly points retired that Dojo is simply a comparatively caller exertion that volition instrumentality immoderate clip earlier we spot however it works successful practice. Especially erstwhile it is applied to the company’s wide-scaled operations.

In a gathering with Martin Viecha [TSLA's VP IR], different large concern slope - Goldman Sachs - concluded that the institution inactive has a batch of enactment to bash to marque Dojo enactment [proprietary source]. Moreover, "FSD connected immoderate vehicle" seems a agelong mode off, astatine slightest for now.

Goldman Sachs, Day 3 Company-Specific Key Takeaways, September 11, 2023 [author's notes]

During the 2Q23 net call, Elon Musk mentioned that Tesla volition beryllium spending northbound of $1 cardinal connected Dojo's R&D implicit the adjacent twelvemonth (outlook includes each related expenses). On a TTM basis, it's implicit 30% of Tesla's wide R&D to date, which is simply a batch (meaning a clump of different probe projects required for a chiefly manufacturing company, nary substance what anyone says).

It seems to maine that contempt the truly absorbing prospects Tesla has acknowledgment to its caller Dojo, Morgan Stanley is rushing things: the existent effect of the instauration of this exertion is inactive acold capable distant to speech astir however galore billions it tin adhd to the already precocious valuation of the company.

Looking astatine however operating margins person behaved lately, I deliberation investors should look astatine Tesla's halfway concern and its conditions earlier jumping connected the AI bandwagon aft the MS recommendation.

Focus On The Core Business First

How person analysts changed their forecasts for the halfway parts of the company's business? Well, highly affirmative oregon neutral arsenic acold arsenic I tin see:

We made nary changes to our assumptions for Tesla Energy oregon Tesla Insurance. The humble ($7/share) summation successful the worth of the halfway Auto concern was mostly related to an summation successful our exit EBITDA aggregate presumption to 13x from 12x previously. Our adjacent word (FY23/FY24) halfway Auto assumptions for measurement and gross/operating borderline were unchanged.

Core Auto: We present worth Core Auto astatine $102/share compared to $95/share previously. Our portion and ATP forecasts stay unchanged crossed our forecast horizon, and we present forecast somewhat higher EBITDA margins successful outer years, partially offset by somewhat little Automotive Gross Profit and somewhat higher capex longer term. Our FY30 EBITDA (GAAP) borderline is present astatine 17.4% vs. 16.6% previously, Auto GP Margin is present astatine 17.4% vs. 17.7% previously, and Capex arsenic a % of Sales is astatine 6.9% vs. 6.5% previously. Additionally, we rise our exit EV/EBITDA aggregate to 13x from 12x previously. At $102/share, the automotive concern trades astatine 15.0x our FY25e Auto EBITDA (vs. 14.1x previously).

Source: Morgan Stanley's report, accent added by the author.

I don’t cognize astir you, but to me, expanding the EBITDA borderline forecast against the backdrop of a gross borderline diminution looks similar a alternatively illogical activity. Adding to the instability of this forecast is an further input of the exit EV/EBITDA aggregate expansion, which I deliberation makes MS's decision adjacent much susceptible to immoderate imaginable downsides.

Today's reality, not a 10-year forecast into the future, is that Tesla is astir actively lowering the prices of its cars, assumingly trying to a) support their interior income targets and b) seizure much of the planetary marketplace share:

Bank of America [September 15, 2023 - proprietary source]

But thing tells maine TSLA won't halt with existing terms cuts and incentives. Why?

The Manheim Used Vehicle Value Index has already begun to set downward owed to declining inflation, making utilized cars progressively affordable and taking distant automakers' stock of the wide demand-side pie.

AI initiatives are great, but they won't play a cardinal relation successful protecting the request broadside successful the foreseeable future. I've written earlier that consumers successful the U.S. and astir places successful the satellite are successful a beauteous deplorable situation: Prices, which person risen implicit the past 2 years, are improbable to decline, and wage maturation is constrained by the authorities of the concern environment, which successful mentation should pb to continued stagnation successful the economy.

The Bottom Line

I deliberation the marketplace is already sick of the changeless communicative astir however atrocious everything is, truthful it buys drawdowns successful risky assets without noticing evident things. Our brains ever effort to beryllium optimistic due to the fact that it’s emotionally easier. This precise crushed to beryllium optimistic has been easy embraced by the masses lately [AI narrative] - which partially explains wherefore TSLA has risen truthful overmuch compared to the remainder of the sector:

I don't mean to diminish the company's merits - the mode they support their marketplace stock and continues to turn is amazing. But the optimistic portrayal of the company's AI initiatives seems overstated, arsenic determination is inactive a agelong mode to spell earlier this exertion is commercialized successful the existent satellite [as acold arsenic I got it]. And until that clip comes, determination volition beryllium months of multi-million dollar R&D and CAPEX spending that volition not assistance the sustainability of margins with specified an progressive attack to lowering the terms of the company's products.

Overall, I expect TSLA banal to proceed its downward trajectory arsenic the AI hype dissipates successful real-time. Long-term introduction targets for investors, successful my opinion, are successful the 25-30 times EV/EBITDA range, which is ~43% beneath the existent aggregate [in the mediate of the range].

Thanks for reading!

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