Key points:
- The aim of every hot tech growth stock is to mature into a boring manufacturer
- Has Tesla reached this stage now?
- The Tesla valuation will then depend upon what we think comes next
- Who Are Tesla’s Competitors?
Tesla Inc (NASDAQ: TSLA) stock reacted pretty much with a “Meh” to the earnings announcement, Which is odd given that it was a significant beat. 65% revenue growth Y/Y, $2.3 billion in GAAP income, some third of a million vehicles produced. We’d expect more movement even in the Tesla stock price to news like this. So, why didn’t we get it?
One answer is that the expectations of some were much higher than the consensus which just got beat. So, their disappointment is enough to restrict any bounce in the Tesla price.
However, there’s a rather more complex story that requires consideration. Is Tesla now to be valued as an actual manufacturer rather than as a hot tech stock? It is, after all, the aim of every such hot stock to grow into the future that the hot valuations predict for it. Tesla is doing exactly that. As we’ve said before Tesla isn’t, not really, a collection of hopes and dreams about what it can do, it’s an actual manufacturer of a million vehicles a year and more. At which point we might think that the excitement has gone and so the earnings multiple rightly should fall.
Also Read: What is Tesla’s CSR Policy?
It’s also possible to add one more layer here. Which is that the macroeconomy is changing. We know very well that we’ve got inflation right now. It’s likely that this will persist. Also, that the Federal Reserve is going to significantly raise interest rates in the near future. This radically changes how we should value different types of companies.
Those swallowing capital in order to produce income sometime, maybe, become very much less attractive in relation to those producing right now and throwing off cash as they do so. If the time value of money – inflation and interest rates – changes then so should the valuation of companies with different cash consumption and production profiles.
As we’ve also said about Tesla they have passed that line from consumption to production of capital. The company has also been dragged over the line by Musk just at that time that the more general valuation change is taking place.
So, we’ve two influences here from that macroeconomic point of view. Tesla has “got there” in the sense that it’s a real manufacturing company now. That means that the valuation of future hopes rather falls. Also, given that it’s a much larger company now only larger and larger events will move the dial.
On the other hand, running the other way, we’ve that fact that capital consuming activities should now be falling in value with respect to capital creating ones. Tesla seems to have crossed that line just as that macroeconomic situation changes.
It’s possible to balance these stories to produce any of three results, Tesla’s stock price booms, falls or stays static. Which is our trading problem of course, which story, or balance of them, to believe?
