We’ve been of the view that Tesla was greatly overvalued forever, a view that the market profoundly disagreed with for a number of years.

Our basic thought was a) it is probably easier to reverse engineer EV’s and even the AI’s than would drive them than it was to scale up production, basically a variant of “making cars at scale is really hard and only a handful of companies have the engineering know-how” b) Elon Musk was as much maverick as magician, and that could prove dangerous.

As the years went by, c) betting production on China came along as a new source of risk, given the dangers of having one’s technology copied away, and then being displaced in the local market.

I think all 3 of those risks are playing out, now.

The below is a quick look at what’s happened.

Tesla is a car company. As you can see, most of the revenues are car related.

Leasing, regulatory credits, and energy generation + storage are tiny bits of the business, its mainly car sales.

Now sales are coming down. Two years ago, there was no peak or plateau in growth priced into the forward multiples, instead it was priced (i.e. expected) to grow and grow and grow. That growth not only hasn’t happened, but it’s gone into reverse.

Competition in the EV space had come at last. Discounting prices (and really, amidst what has become an EV price war) has hurt profits.

Tesla has now found itself with lots of unwanted inventory, and moving those cars is proving difficult.

The working capital movements ate all the cashflows, with TSLA printing $242m over the March quarter. Let your eye drift to the small blue bar below, it’s been over 4 years or 16 quarters since we last saw a print like that.

How problematic is all this?

Well, the stock trades on ~60x forward earnings. It has a declining revenue and earnings profile. It’s under serious competitive threat. I don’t know of too many companies where those things are simultaneously all true and in a harmonious equilibrium.

The share price has comprehensively outstripped the earnings growth, in our view, the opposite is now likely to hold.

Now, regular readers might have a different view, and that’s fine. There is a world in which FSD works, and dominates, and therefore TLSA emerges victorious. Totally fine.

But the above is a good illustration of what’s gone awry. And note, none of this discussed the engineering and production difficulties they’ve encountered (product recalls, defects, longer run consequences of prior choices regarding battery tech selection etc), which absolutely should be factored into anyone’s thinking.

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