Over The Pond – The Tesla Enigma
Written by Julian Wheeler – Partner and US Equity Specialist
The Cambridge Dictionary definition of an enigma is “something that is mysterious and seems impossible to understand completely”. I couldn’t think of a better title for an article about a company that attracts more media attention than any other, thanks largely to the very public words and deeds of its founder and CEO, who needs no introduction.
It is not the company’s business that is enigmatic; Tesla makes cars (that just happen to be powered by battery rather than gasoline) and then it also sells ancillary products related to that technology, both charging stations and battery storage. No, the mystery is why so much value is ascribed to the shares of a company that has done nothing but disappoint investor expectations for the last three years. Even more so when the very profitability of the business now relies heavily on very favourable regulations regarding carbon credits. Have a look at U.S. solar companies to see what happens when these are cancelled. It astonishes me that the valuation of Tesla’s shares appears oblivious to that substantial risk.
While it previously was the undisputed industry leader in EVs, Tesla has now been caught and passed by Chinese manufacturers, and there is absolutely no indication that it can regain that leadership. Elon Musk’s political ties to Donald Trump have been blamed for some of the recent weakness, especially in California, but the simple truth is that Tesla car sales are in decline because they no longer produce a product that consumers particularly want to buy. While Elon Musk is doing a fine job of brand destruction, one worthy of Gerald Ratner, Teslas are no longer special or novel cars anyway. The loss of market share is global, which can happen to any consumer product company if they are surpassed by competitors on quality and/or price. With Tesla it is happening on both counts.
Every new product from Tesla appears later than the date intended by Elon Musk, who really is the maestro of overpromising and underdelivering. The “new” “affordable Model Y” is supposed to be launched in the first half of this year, so unless something appears out of nowhere in the next week, that impressive streak will continue. The last genuinely new model was that monstrosity of a Cybertruck that Dr. Frankenstein would have been proud to have designed; it is an unmitigated failure and is now changing hands or being returned to the company for 45% less than the original purchase price. Coming into this year, we were again led to believe that 500,000 a quarter was the target for car deliveries – well, they might sell 375,000 cars in this latest three-month period, and I reckon that is optimistic. For the moment, at least, Tesla is firmly stuck in reverse gear.
To be fair, Elon Musk has pretty much admitted this, along the lines of ‘don’t buy Tesla stock for its cars’. Therefore, what are we getting to justify buying shares at over 1 trillion (yes, trillion with a T) valuation on June 23rd 2025 that this car company (sorry, not a car company) is currently assigned? This level was reached following a gain in share price the day after Tesla’s robotaxi’s officially launched in Texas. The cheerleaders believe in this amazing future when Tesla is going to dominate the autonomous vehicle market thanks to all that AI-enhanced data, collected from customers while they were driving their own cars around over the past decade. These Tesla owners are then going to be delighted to turn their cars over to the ‘Robofleet’ in their spare time, which will allow the company to leapfrog the number of taxis in operation of their more established competitors, whose vehicles are already plying their trade. And who are they? Some tiny start-ups that Tesla can elbow aside? Not quite. Google and Amazon in the U.S., while one of Uber’s new Wayve test vehicles cruised past me on my bicycle in London this week. The Bulls never discuss the implications to the price of a cab ride once all these new vehicles hit the streets. Good for consumers – not so much for company profits, I suspect.
What is even more astounding is that we don’t even know if Tesla’s product works! They have not demonstrated anything remotely close to what is called L4 – genuine driving with no human intervention. This upcoming trial in Austin is the equivalent of a child riding a bike on stabilisers; even if he doesn’t fall off, he’s not exactly ready for the Tour de France. Then there is the risk that Tesla has taken by eschewing the LiDAR technology adopted by everyone else, for their own version that just uses cameras. Cheaper it may be, but safer? I wonder what the regulators are going to think about that. Remember Sony and Betamax in the 1980s? Everyone else chose VHS – the rest is history.
The other much-hyped ‘new, new, thing’ in Tesla’s locker is humanoid robots. Much has been written about the mistake of making a robot in this form anyway – too many moving and easily breakable parts – but leave that aside for the moment. Just as with driverless cars, there is this rose-tinted assumption that Tesla will be one of, if not THE, leader in this field; it is a bit like Manchester United supporters thinking they are going to win the Premier League next year, just because they used to do so in the past. Given the current players they have, or lack of anything more than test models in Tesla’s case, there is absolutely no justification to have that opinion. There are at least 20 viable robotics companies, mainly in China, who all have a clear lead over Tesla in time, cost, and supply chain.
Meanwhile, in the U.S., Nvidia announced just this week that they will start using their own humanoid robots to make servers in a Houston factory from Q1 next year. They are partnering with Foxconn, arguably the world’s greatest manufacturer at scale – they make the iPhone after all. No doubt another competitor that Tesla will just brush aside once Musk’s version arrives. It will be ‘widely available next year’ allegedly; anyone care to bet on that?
Close your ears to the sirens and promoters; until and unless Musk comes good for once on one of the myriad of broken promises, it most certainly is a car company. With declining sales, it is therefore a very expensive one at that; whoever is at the wheel, the sign in the road says Sell.
For more background on our U.S. market views, visit the Over the Pond archive.
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