I personally believe Tesla is totally overprized. There are many different reasons for my thinking.
Tesla makes great cars. They look good, run excellent and are electric, hence are cheaper to drive. However, I am less impressed with Tesla’s business as I am with its product itself. But why?
After years of losses, the company finally turned profitable in 2020. But what people usually do not know is that Tesla’s cash cow is not car sales. Tesla makes most of its money from carbon credits sale.
Companies are granted carbon credits for reducing their carbon output. Electric vehicle makers like Tesla earn a lot of carbon credits. Electric vehicles do not pollute as much as petrol driven cars. These credits can be sold to other companies that reach or are above their carbon output limits, allowing these companies to pump out more carbon. As a result, Tesla sells carbon credits to companies like General Motors that are putting out more carbon into the environment. Tesla makes a profit from these carbon credit sales.
Last year, Tesla made $1.5 billion selling carbon credits, something the company disclosed only when forced to by the Securities and Exchange Commission. But this amount is decreasing. 2nd quarter 2022 revenue from carbon credits was 50% less. Tesla’s $68 million profit from selling some of its Bitcoin holdings also added to the 2nd quarter’s results. This means that most of Tesla’s revenue comes from non-car-related activities. Largest income is derived from carbon offsets, which are declining significantly.
But another reason for my scepticism is Elon Musk himself, Tesla’s founder and CEO. Musk is regarded a genius by many. He created an excellent product. He is also a game changer in many ways, but he becomes terribly distracted, and doesn’t run a good business anymore. Instead of managing a successful international business, he is spending time going into space, making bids for unrelated businesses like Twitter) and getting himself occupied into major lawsuits. He is in trouble with the SEC and gets into fights with the Federal Aviation Administration. He is not focused on directing and managing a car producing company anymore, a task difficult enough on its own.
Tesla has more competition than it did in the past. The pressure is on. The competition is not sleeping. Tesla has also made headlines for mistreating employees. Charges of harassment, discrimination and forcing people to work without being paid for overtime have caught the attention of the media but also institutional investors.
Let’s say it like this. The stock is currently priced for perfection. Tesla trades at a P/E of 66, with an expected earnings growth of around 85% in 2022 and 36% in 2023. The bars are set high, and a shortfall could send the stock south.
Considering that Tesla doesn’t make as much money from its actual products as it would like you to believe and making most money in a decreasing niche of selling carbon credits as well as Musk’s volatility as a business leader, a shortfall might become a reality. Beware!