Despite a recent pullback, Tesla shares have enjoyed a massive rally this year punctuated by some solid quarterly profits. Is there more room to run for Tesla’s stock price, or are there warning signs ahead? Anthony Okolie talks with David Mau, Portfolio Manager, TD Asset Management about the bull and bear case for Tesla.
- Despite a recent pullback, Tesla shares have been on a massive rally this year, punctuated by four straight quarters of profits. The big question is, is there more room to run for Tesla stock price, or are there warning signs ahead? Today, we do the bulls and bears case for Tesla.
Joining me is David Mau, Portfolio Manager of TD Asset Management. David, thanks for joining me.
- Hi, Tony.
- OK, David. Let's get into it.
All right, let's start with the bull case. First one, huge market opportunity for electric vehicles.
- Yeah, absolutely. That's right, Tony. There is a huge market opportunity here for the sector in general. I mean, look. Global electric vehicle penetration is only about 2% to 3% of new car sales right now.
But the expectation is that in about 10 to 15 years, electric vehicles are going to account for over 50% of new car sales, which would mean that EV sales should be about 50 million units a year. So there is massive potential for a company like Tesla to grow its sales and profitability over time.
- Now, you also say that Tesla is a technology leader.
- Yeah. So, I mean, the second bull point that we can make here is that Tesla does have a huge lead in terms of electric vehicle technology, and especially when it comes to battery development, right? So last week, Tesla held its highly anticipated Battery Day, and the company said that they expect that they're going to be able to reduce the cost of the battery by more than 50% over the next three years.
So that's going to be huge. And the reason that this is so important is that because of all the components that go into an electric vehicle, the battery is the absolute most expensive part of the entire car.
So being able to reduce the cost of the battery is really supportive for Tesla's profit margins. And not just for Tesla's profit margins, but it also makes an EV, in terms of price, much more competitive when it comes to new car buyers.
- Now you also say of Tesla that size, scale, and brand recognition matters. Tell us why.
- Yeah, for sure. So, I mean, right now, nobody in the world sells more electric vehicles than Tesla, and the Tesla brand is widely known and trusted and recognized all over the world, right? So another long-term target that Tesla has, and which they announced last week, is that they want to produce 20 million cars annually.
Right now, they're not anywhere close to that number. But they do already have plants in the US, in China, and now Europe where they're actually producing cars and selling cars. So if the company is able to deliver on these targets that they've set up for themselves, I think they have a very good chance to not only maintain, but extend their leadership position versus all of the other brands.
- OK. So we've talked about the bulls case. Now the bear case.
First, let's talk about valuation.
- Sure. And listen, Tony, that's the biggest bear case against Tesla right now is, when you look at valuations, especially on traditional valuation metrics like price to earnings, or enterprise value to sales, enterprise value to EBITDA, Tesla is extremely, extremely elevated.
At the moment, Tesla trades at 120, more than 120 times forward PE, whereas most other carmakers trade at somewhere between 5 and 10 times. So it is a bit of a struggle for some investors in the market to wrap their head around these valuation levels.
So for these investors, I mean, Tesla has to really, really execute pretty flawlessly over the next five to 10 years for these valuations to make sense. And execution has been sometimes a challenge for the company in the past. They have a history of not always being able to live up to the expectations and the projections that Tesla makes for itself within the timeframe that they say they're going to do something.
- OK, so talk to me about Tesla's competition next.
- Yeah. So, I mean, another point to make on the bear side is that, despite there being a huge market opportunity in the coming years for electric vehicles, the competition from traditional automakers and also from new startups is really increasing.
I mean, look, we're still in the early innings of electric vehicles. And Tesla does have the lead right now. But there's no guarantee that they can maintain its leadership position as the market matures, especially with all of these companies, all the new pouring billions and billions of dollars into the development of EVs.
- Now, what about questions about Tesla's profitability?
- Yeah, that's a really good point, Tony. Earlier on, you mentioned that Tesla has reported four straight quarters of profitability. But what some people may not realize is that all of Tesla's profitability over the last year has come from the sale of regulatory emissions credits and not from the sale of cars.
Tesla's actually losing money on each electric vehicle that they sell right now. Now, the sale of these regulatory emission credits, they're not going to last forever. Because as other carmakers ramp up their own EV sales, they're not going to need to buy these credits from Tesla anymore.
So the question is, is Tesla going to be able to replace what they're earning from these emission credits with profits from actual auto sales? And the answer might be yes if the company can reduce the battery cost by as much as they say they can. Or it could actually take them a lot longer to turn a profit if their battery development targets are delayed. So right now, the future profitability of Tesla is still pretty uncertain.
- We've looked at the bulls and bears case. So who's on top, bulls or bears?
- Yeah, that's a good question. Well, I mean, for me, from an operational perspective, I think I'm actually fairly positive on Tesla. We talked about the battery technology. We talked about them being able to ramp up production and as well as their future profitability.
And I think these are all things that will come over time. I think as a CEO, Elon Musk does sometimes overpromise what the company can achieve, and there's certain cases where it's taken them longer to achieve their goals. But for the most part, he does eventually get there.
From a stock perspective, I think that the market does treat-- I mean, the stock's up over 400% year to date. And I think the market does treat Tesla more like a technology company as opposed to an automaker, and that's why it assigns higher valuation multiples.
So people need to understand that what the price is reflecting now is what they think is going to happen for Tesla in five to 10 years, not necessarily what's going to happen in the next one to two years.
- David, thank you very much for your time.
- You're welcome. Thanks for having me.