🔒 Tesla isn’t down for the count, give credit where credit is due: Matthew A. Winkler

In the tumultuous landscape of electric vehicle manufacturing, Tesla Inc. faces a challenging downturn, shedding 50% of shareholder value since November 2021. Elon Musk’s controversial tweet and a decline in analyst recommendations add to the woes. Despite ceding its zero-emission crown to BYD Co., Tesla’s profitability and wider profit margins present a formidable edge. As the market fluctuates, Tesla’s resilient earnings power positions it strategically, maintaining dominance even amid a significant stock slump, with a valuation still towering over competitors.

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By Matthew A. Winkler

For Tesla Inc., being the tenth most valuable company with the greatest market capitalization and fastest growing profitability of any maker of cars and trucks, is seemingly atrocious.

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Losing 50% of shareholder worth since the November 2021 all-time high in the stock price while suffering the longest consecutive weekly decline in seven years is a foreboding trend, especially when Austin, Texas-based Tesla is ceding its No. 1 zero-emission perch to China’s BYD Co. amid slowing sales. Chief Executive Officer Elon Musk’s antisemitic tweet last year on the X platform he rebranded after acquiring Twitter for $44 billion was yet another reason for the eroding confidence among his most loyal investors.

Analysts already retreated from Tesla to the extent almost 65% no longer recommend the shares. As my Bloomberg Opinion colleague Liam Denning summarized after Tesla’s disappointing earnings call last week: “Tesla began 2023 valued at $341 billion. Over the ensuing 12 months, earnings fell by 24% (excluding the fourth quarter’s non-cash tax benefit) and the consensus forward earnings estimate for Tesla dropped by 27%. Valuation today: $660 billion. That wave needs to be a tsunami.” Or as Adam Sarhan, founder and CEO of 50 Park Investments, told Bloomberg News on Jan. 21, “If Tesla is lowering its forecast and not bullish in the near term, why should investors be bullish,” adding that “there is no floor in this stock in the near term.”

And yet, there doesn’t appear to be a ceiling for Tesla shares either. While Tesla “may not be growing 50% a year as the company thought, this year in a tough environment” Tesla is “still growing volume by 15% to 20% per year and making us $7,000 per car of gross profit,” David Baron, manager of the Baron Focused Growth Fund, who predicted Tesla will appreciate 56% to $300 a share in about 12 months and 525% to $1,200 by 2030, said during a Jan. 26 interview with Bloomberg News.

Although BYD may be attracting favorable attention in the media for overtaking Tesla as the global sales leader in the fourth quarter, profitability is another matter and one that is closely scrutinized by investors. The Shenzhen, Guangdong-based company led by Wang Chuan-Fu, turns $100 of sales into $11 of earnings before interest, taxes, depreciation and amortization expenses, for an Ebitda margin of 11%. The ratio fluctuated between 11% and 16% during the past 10 years, peaking in 2016. Tesla is turning $100 of revenue into $14 of earnings, delivering an Ebitda margin of 14%. Back in 2016, Tesla lost $8 for every $100 of sales, so its relative strength in generating earnings increased as BYD’s declined, according to data compiled by Bloomberg.

Both companies showed so-called free cash flow, or money received from operations minus capital expenditures, since 2019 (Tesla generated $4.4 billion during the past 12 months and BYD $1.8 billion) and BYD’s capital expenditures — money it invests via acquisitions, acquiring physical assets or equipment — increased to $4.8 billion in the third quarter last year from $400 million at the end of 2020, almost twice Tesla’s $2.5 billion quarterly spending during the same period.

For all its challenges competing against entrenched auto giants, Tesla shares gained 832% during the past five years, or almost three times BYD’s 296% total return (dividend income plus appreciation) and 15% during the past 12 months — a 14 percentage-point margin greater than the equity benchmark for global auto makers when BYD shares lost 29%, according to data compiled by Bloomberg. (Unlike BYD, Tesla doesn’t pay a dividend.)

BYD briefly became the global favorite in July 2022 when investors paid about 114 times what analysts estimated the company would earn, almost quadrupling Tesla’s 30 times multiple, for a 300% premium. But BYD’s multiple declined to 16 since then while Tesla’s rose to 59, showing that global investors now trade BYD at a 70% discount to Tesla even though BYD sold more electric vehicles during the past quarter.

Losing almost a third of its value since late December would seem a mortal wound to any company. But superior earnings power appears to be the cushion that enables Tesla to survive slower sales as the company retrenches and Musk prepares to introduce its lowest-costing vehicle yet to combat growing competition from around the world. So even after suffering one of its biggest slumps since it became a public company in 2010, Tesla’s value remains almost twice No. 2 Toyota Motor Co. and nine times BYD’s current valuation.  

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