**Tesla Stock Plummets After Mixed Q2 Earnings: Analysts Predict a Nightmare for Musk**
Tesla’s stock plummeted over 9% following the release of its mixed second-quarter earnings report. This decline has led some Wall Street analysts to predict a nightmare scenario for Elon Musk and his company. David Trainer, the CEO of investment research firm New Constructs, believes that Tesla is only worth $26 per share. He cites deteriorating margins and waning demand as the main reasons for this low valuation.
**Tesla’s Q2 Earnings Show Marginal Decline and Falling Demand**
While Tesla managed to beat Wall Street’s consensus estimates for the second quarter, with a reported revenue of $24.9 billion compared to the forecasted $24.51 billion, its margins were under pressure. Tesla’s gross profit margin dropped from 24% in Q4 2022 to 18.2% in the last quarter, slightly below Wall Street’s estimate of 18.8%. Additionally, Musk hinted at a potential decrease in EV production for the third quarter and suggested that more price cuts may be necessary. The uncertain economy further adds to the concerns surrounding Tesla’s profitability.
**Price Cuts and Rising Competition Pose Challenges for Tesla**
To combat rising competition and economic challenges, Tesla has reduced prices on some of its popular EV models over the past year. However, this strategy raises concerns about the sustainability of the company’s profitability. Analysts worry that continued price cuts could lead to excessive inventory levels and further pressure on falling margins.
**Bullish Investors Optimistic, but Analysts Warn of Unfounded Optimism**
Despite the pessimism from Wall Street bears, Tesla’s stock has seen a significant increase of over 140% year-to-date. Investors seem to anticipate a soft landing for the U.S. economy and a new bull market for technology shares like Tesla. However, David Trainer cautions that this optimism may be misplaced. He argues that Tesla’s stock fundamentals are disconnected from reality, regardless of the shift in market sentiment.
**Five Reasons to be Bearish on Tesla**
David Trainer, known for his focus on analyzing corporate fundamentals, outlines five main reasons for his bearish stance on Tesla shares. First, he cites the challenge of declining demand amidst rising competition and consistent inflation. As Tesla has produced more vehicles than it has sold for five consecutive quarters, Trainer suggests that price cuts are the only solution to this demand problem. Secondly, falling margins due to price cuts and rising costs pose a significant concern. If demand for EVs slows down, Tesla may have to implement more price cuts, which would further impact margins.
Thirdly, Trainer highlights Tesla’s massive cash burn, noting that the company has had negative free cash flow in all but one year since going public. Despite revenue growth, Tesla continues to burn significant amounts of cash, with a cumulative burn of $4.2 billion in free cash flow over the past five years. Fourthly, Trainer argues that Tesla’s bulls rely too heavily on estimates for its full-self driving business and EV charging network, which are not currently a substantial part of its bottom line. Around 86% of Tesla’s revenues come from car sales, making it primarily an automaker.
Finally, Trainer contends that Tesla’s current valuation does not align with reality. Even though Tesla is profitable, its profits are nowhere near the levels needed to justify its current valuation. Comparing Tesla’s forward earnings multiple to that of tech companies in the S&P 500, Trainer suggests that Tesla is significantly overvalued. To determine a more accurate valuation, Trainer and his team used a reverse discounted cash flow model, which revealed that Tesla’s current share price requires an unprecedented 129% return on invested capital by 2032.
**In Defense of Tesla: Bullish Analysts Remain Optimistic**
Despite the concerns raised by Trainer and other bearish analysts, there are still bullish opinions on Tesla. Dan Ives, a top tech analyst at Wedbush, offers a contrasting view. He believes that Tesla’s gross margins are in a state of stabilization and that Musk’s price cuts have actually helped boost demand for Tesla’s EVs. Ives also predicts that Tesla’s full self-driving technology and EV charging network will contribute to higher profits in the coming years.
Ives draws a parallel between the current state of Tesla and Apple’s situation in 2008/2009, when Apple was just starting to monetize its services and ecosystem. Similarly, Ives believes Tesla is on the right track and suggests that the market may not fully appreciate the company’s potential. He raises Tesla’s price target to $350, emphasizing the importance of the full self-driving technology in bolstering future profitability.
While Wall Street analysts offer differing perspectives on Tesla’s prospects, the stock’s recent decline highlights the market’s uncertainty. Some analysts, like David Trainer, express concern over deteriorating margins, falling demand, and Tesla’s valuation. On the other hand, bullish analysts, such as Dan Ives, maintain an optimistic view of Tesla’s potential in the EV market. Only time will tell which perspective proves accurate.