Investor Spotlight: Has the mighty Tesla share price moved too far, too fast?

Tesla is the ultimate story stock, as I was reminded this week by Bloomberg senior editor John Authers, author of one of the best daily newsletters, The Points of Return.

Elon Musk is the master of creating the narrative, which is exemplified time and again at the quarterly earnings report conference calls.

With the Tesla stock price back at $260, having risen 112% year-to-date and 56% in the last month, many investors are probably scratching their heads and asking, what part of the Tesla outlook has changed?.

Tesla - the facts

The 1Q23 earnings report was far from fancy. Analysts questioned the gross margins, post price discounting and the outlook for EV sales was being directly linked to interest rate levels.

Musk flagged that higher car leasing costs were having a deleterious impact on sales in the home US market and China’s EV market was soft to slow.

On balance, electric vehicles and particularly Teslas are at the higher end of the affordability price point, which classifies them as price elastic discretionary goods. In other words, the demand for Tesla EVs is directly correlated to the price.

The current calendar year is all about the delivery of around 1.8m electric vehicles, and the maintenance of Tesla’s higher gross margins ex green credits, alongside the scaling of the two new giga factories, Berlin and Austin, Texas.

It is also about cost mitigation and the scaling of the 4680 battery packs at Nevada.

What has changed so fundamentally since the May quarterly earnings call (?), when I wrote the following for the Ausbiz View:

“Tesla reported a -20% decline in earnings from a year ago, which met analyst expectations on first blush. But the devil is always in the detail and a miss on the gross margins at 19.3% versus Refinitiv consensus of 22.4% was enough disappoint the market.”

The stock price was trading around US$160 after the earnings call, and although analysts’ share price targets stood at US$180 upwards to US$250, investors were dumping the stock in anticipation of a tough year for the company.

Tesla’s evolving composition – what’s changed since April

Firstly, Musk appointed the former chair of Global Advertising and Partnerships at NBCUniversal, Linda Yaccarino as the new CEO of Twitter. Given the amount of consternation around the Twitter/Musk fiasco, this amounted to the removal of a major headwind for Tesla.

Musk was freed up to working on Tesla, which he has embraced with vigour. He has visited China, Mongolia, and was feted this week by President Macron, in support of France securing a slice of the Tesla growth pie.

There remains an ongoing commitment to total Tesla EV production of 20m vehicles by 2030. The current production of almost 2 million vehicles only represents 2% of total global car production annually.

Apart from the goodwill and feel-good factor of seeing Musk back on the road to Tesla expansion, the company has inked a very lucrative contract to expand the US Tesla supercharging network to include GM and Ford. The contracts give Tesla access to the Biden administration’s US$7.5bn in network charging funding from the Inflation Reduction Act.

The agreement also provides an ongoing stable revenue stream for Tesla.

Dan Ives from Wedbush Securities sums up the material shift in sentiment for the company.

“The sum-of-the-parts story for Tesla now further comes into play with its supercharger network, energy business, AI driven autonomous path, unmatched battery ecosystem, and increased production scale/scope globally adding to the Tesla golden EV success story still in the early days of playing out with customers.”

[June 14 “Street Starting to Factor in an "AWS Moment" for Tesla With EV Scale/Scope Key”]

Where to from now?

Ives has a US$300, 12-month price target on Tesla. The highest target stands at US$335 and the average at US$194.84, according to CNBC.

From a fundamental perspective, China’s demand is showing signs of picking up and there have been some price improvements. The network charging deal is a huge win, and any further giga factory announcements will be greeted positively.

Most notably, Tesla is positioned in the artificial intelligence narrative on the back of the full self-driving software (FSD). This is far from new, but the market is fixated on any AI story. If Musk can eventually succeed with the robo-taxi concept, Tesla will most likely be the most highly valued company in the world.

But for now, that is at best a narrative. Whether you buy at current levels depends on your belief in Musk to deliver a globally transformative clean energy, transport, and AI conglomerate over time.

In the short term momentum and sentiment is positive, until markets take fright and profit taking re-emerges. Scaling into a Tesla position might just be sensible.