THE TESLA PARADOX DRIVES INTO A WALL
One big tech company seems unimpeded by the weakness in the global economy. It is selling every product it makes, and yet its shares are still headed south.
Tesla (TSLA) reported on Wednesday that third quarter profits doubled year-over-year, and revenue shot up 55% to $21.5 billion. Analysts are worried that business can’t get better.
Big stock moves are about narratives. Lousy macroeconomics are winning, for now.
The race to electric vehicles in the automotive sector is continuing full throttle, and Tesla has a commanding lead. In addition to making the most advanced EVs, Tesla is has the most supply chain leverage, efficient factories, and highest operating margins, at 27.9%. The Austin, Tex.-based company in 2022 is on pace to build 1.5 million EVs. Every vehicle is pre sold at a huge profit. Tesla is crushing the competition in every way.
On the conference call Wednesday, Elon Musk, chief executive officer, said Tesla has more demand than production capabilities for the foreseeable future. The only major issue is logistics bottlenecks that are preventing the company from getting vehicles to customers.
Analysts heard … “constraints.”
This is a strange time. The global economy is coming apart at the seams. Central banks are recklessly raising interest rates to fight inflation, and politicians are engaged in hot and cold wars for future hegemony. These processes are uneven, yet they are taking the same bite out of corporations, especially big tech.
Inflation in Europe is not nearly the same as inflation in the United States. The European problem is supply-driven. There is simply not enough energy, given the dependence on Russia. In the U.S., the issue is really about too much demand for too few goods, given the on again, off again covid-19 restrictions in China, where most of the world’s goods originate.
All of this is being complicated by a hot war in Ukraine, and a worsening cold war between the U.S. and China.
Inflation and the wars should be impacting Tesla. Its biggest market, by far, is China. Its biggest factory is there. Giga Shanghai makes one shiny new Tesla every 35 seconds. Tesla China says that 83,135 vehicles were sold out of the facility last quarter, and that was with covid-19 down time.
By any measure, Tesla as a business is rolling. Musk noted that the company is expanding production ramps as quickly as possible to meet red-hot demand.
The company signed a deal in May with Vale S.A. for nickel used in battery production. The EV company also contracted with Samsung in July for cameras, required for its full self-driving software.
FSD software could be a big new business for Tesla. The company announced Wednesday that 160,000 people have now enrolled in the program. New FSD software packages cost $15,000 per license, up 100% since 2019 when it was first revealed.
Tesla is a great business.
The analogy to Apple (AAPL) and mobile handsets is legitimate. Both businesses make the best product in their industries, with the most loyal customers, and highest profitability. If there is any quibble, Tesla has greater operating leverage since its core business is more vertically integrated, and EVs as a market segment are growing faster than smartphones.
Unfortunately, the larger narrative is that rising interest rates will kill automobile demand, especially at the high end of the market where consumers typically finance costs. That headwind is impacting every vehicle manufacturer, automotive retailer, and even the parts makers. Ugly macroeconomics are killing investor sentiment. That is a roadblock to higher share prices.
It’s hard to say when this will change, however, if history is any indication stocks should attempt to rebound moving toward year end. Seasonally, this is a stronger period, when money managers who have performed poorly begin to put money to work to catch up. This transition occurs every year like clockwork.
In the interim, Tesla is the best business in a weak sector.
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