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The fall of Tesla (NASDAQ:TSLA) stock is inevitable.
At its April 25 opening price of about $161 per share, Tesla had a market cap of about $515 billion. That’s more than all of China’s electric car industry put together, three times more than the rest of the U.S. auto industry. It’s about 2.5 times the value of Toyota Motor (NYSE:TM), which made 10.48 million cars last year.
I get it. Gas-powered cars are going away. Electric cars are all about batteries. Tesla makes batteries. But CATL, which is only traded in China, has one-third of that market and is Tesla’s key supplier. Its valuation, translated to dollars, is $142 billion, less than one-third that of Tesla. It’s also supplying Tesla’s competitors.
Tesla Bull Delusion
I’ve heard the delusions of the Tesla bulls.
Tesla is way ahead of the competition, they say. I agree.
That doesn’t make Tesla worth 5 times sales and 47 times earnings. It’s true that Tesla makes its own batteries. Tesla doesn’t have dealers, so Tesla doesn’t have a retail markup. Yes, Tesla gets money after the sale from charging and service. Tesla also makes solar panels.
But look at the numbers. Over 85% of revenue last quarter came from selling cars. Revenue from batteries and solar panels rose only 16% from the previous quarter. Free cash flow was down 80% year-over-year.
Now look at General Motors (NYSE:GM), which trades for barely one-third of its sales. GM had twice Tesla’s revenue, nearly as much net income, and just 10% less operating cash flow. GM raised guidance despite layoffs of gas-powered car employees. It trades at just 5.6 times earnings and pays a dividend.
I am not saying GM is a better company than Tesla. But it’s worth more than one-tenth of Tesla. The same is true for Ford Motor (NYSE:F), whose dividend now yields 5.8%.
This comes with a caveat. Tesla’s latest price cuts put some of its cars’ sticker prices below the U.S. average. GM’s decision to abandon the mid-market Chevy Bolt in favor of more big trucks is short-term stupidity at its finest. We will see what happens. There remains a big hole in the market.
You’re Not Helping, Elon
Let’s not even get started on Elon Musk. Tesla lost $50 billion in market cap. Musk’s giant SpaceX rocket exploded, uh, and went through “rapid unscheduled disassembly before stage separation.” Twitter has lost half its value and is being laughed at.
What’s left for Musk fans is a clownish slavishness worthy of a Third World dictator. “Amid a dull collection of multi-nationals taken over by their woke staff, ruled by governance codes, kept afloat by subsidies, and protected by tariffs and trade barriers, we need a few more Musks,” one wrote.
Excuse me. Tesla was built on government tax breaks. SpaceX requires government contracts to operate. Musk has moved his offices from California to Texas and (now) back again based entirely on the need to please governments whose support he needs to grow. If Elon Musk were any more woke, he’d be up on cocaine charges.
In the process, Musk destroyed Tesla’s reputation with its target market. Analysts now question whether there will be demand for the 2 million cars Tesla plans to build this year. Tesla’s price cuts will reduce margins.
The Bottom Line
Tesla deserves to be the world’s most valuable car company.
But it was inevitable that the rest of the industry would catch up. The Chinese already have. The U.S. electric car industry is just getting started, and they’re the target of the government’s newest subsidies.
Analysts are more divided on Tesla stock than they have been in years, with just over half saying buy and four telling investors to sell.
Tesla may still be a great company, and Elon Musk may be the greatest auto executive since Henry Ford.
On the date of publication, Dana Blankenhorn held no positions in any company mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.