[New York 20th Reuters BREAKINGVIEWS]–I think there is a big difference between the reality of the US electric vehicle (EV) giant Tesla and the market evaluation.
Tesla’s second-quarter results were damaged by the same production problems that plagued other automakers. However, the market capitalization of $ 770 billion reflects an optimistic view that can never be held by any of the remaining manufacturers. Whether it’s a robotaxi or a humanoid robot, investors continue to expect Elon Musk, CEO, to change the world.
Tesla’s sales decreased by about 10% year-on-year, but still increased by 42% year-on-year, maintaining its growth mode. However, profitability declined as raw material prices soared. Although the gross profit margin of the core automobile sector is still higher than that of General Motors (GM) and Ford Motor Co., it fell from 32.9% in the previous term to 27.9%.
The special status Tesla has enjoyed over these existing manufacturers is also swaying. In particular, income from automobiles decreased by more than 13% from the previous quarter. According to Wells Fargo, this is roughly in line with a 15% decline in production, more than a 9% decline in industry as a whole. In other words, Tesla has suffered the same turmoil as its rivals, and the new EVs they introduce are eroding Tesla’s leading gains.
However, Tesla’s current corporate value still expects the company to continue to have many special elements. First, let’s assume that this year’s deliveries will reach our very ambitious target of 1.5 million units. Tesla earned about $ 56,000 per car in the first half of the year. If the operating profit margin is 20%, the annual operating profit will be less than $ 17 billion. Applying this to 14 times the price-earnings ratio (PER) based on Ford’s profit outlook, Tesla’s automotive sector is worth about $ 240 billion, less than one-third of the company’s market capitalization.
To be sure, Tesla is more profitable than its rivals and stands out in terms of production sophistication. Still, there is a tremendous difference between the reality and the evaluation. Musk has promised that Tesla will be much bigger than just a great car maker, and has come up with ideas for robotaxis and humanoid robots called “Optimus.” But the company is facing more mundane concerns, such as the impact of rising interest rates on demand, federal investigations, and fears of a conflict.
Investors take full advantage of Tesla’s potential, but take little account of the company’s risks.
● Background news
* Tesla announced second-quarter sales of $ 16.9 billion, up 42% year-on-year, but down 10% quarter-on-quarter. It was slightly below the refinitiv-based market forecast of $ 17.1 billion.
* The gross profit margin of the core automobile sector fell from 32.9% in the previous fiscal year to 27.9%. The operation of the factory was hindered and supply restrictions echoed.
* Production in the second quarter was 258,850 units, down 15% from the previous quarter. Still, according to the company, June was the highest monthly production ever.
(I’m a columnist for “Reuters Breakingviews”. This column is based on my personal opinion.)