Elon Musk wants people to only invest in Tesla if they are convinced the company can build self-driving cars. The problem is, the stock is already trading at levels that assume the company has cracked that code, and then some.
The electric vehicle maker’s shares are significantly more expensive than those of Nvidia and Microsoft, two large-cap companies widely considered pioneers in artificial intelligence (AI). Yet while profit estimates for these two tech giants are rising, those for Tesla are falling, due to slowing demand for electric vehicles.
“Musk always wanted Tesla to be seen as more than an electric vehicle maker, but it works when the core business is growing,” said David Mazza, managing director of Roundhill Investments. “That’s why I think the current multiple is disconnected from reality and the stock is not cheap, although it has fallen a lot this year. »
Tesla stock trades at 63 times forward earnings, compared to 33 for Nvidia and 30 for Microsoft. And as analyst expectations for Tesla’s earnings continue to fall – especially after the first quarter report fell short of expectations – the valuation multiple continues to widen.
Shares were in freefall until last week amid nervousness about Tesla’s growth prospects. But the quarterly earnings conference call, during which Musk made a bold statement about autonomous vehicles and AI, marked a turning point for the stock.
Since those results, the stock has soared more than 24%, helped by news that the company is close to getting approval to launch its driver-assistance software in China.
But Mr. Musk’s determination to achieve this ambitious goal comes at a difficult time for investors. Fully autonomous cars are a technology that most analysts and experts say will likely not be widely adopted commercially for years, if not decades. Tesla is struggling with weak demand for electric vehicles and just announced the first drop in quarterly sales since 2020. Additionally, it appears to be divesting from projects once considered a key strategic advantage for the company, such as its charging network.
More importantly, Tesla has offered investors little evidence, outside of Musk’s accomplishments, to show that its efforts to create a truly autonomous car will be more successful than General Motors’ Cruise, which grounded its fleet of cars last year, or that the Argo AI from Ford and Volkswagen, which was discontinued in 2022. Tesla intends to unveil its “Robotaxi” in August.
“Tesla is a faith-based stock”
“Fully autonomous driving may not be a win-win market, and if it is, it’s not clear that Tesla wins,” said Toni Sacconaghi, an analyst at Sanford C. Bernstein. . The analyst’s use of driver assistance software – which Tesla began offering as a free trial – also revealed deficiencies in everyday life. Overall, opinions on the software are divided.
On the other hand, both Nvidia and Microsoft have proven that their AI skills are unquestionable. As a chipmaker, Nvidia dominates the market for accelerators that power data centers running complex computing tasks needed for AI development. Microsoft, which has relied heavily on OpenAI, is already seeing demand for its AI offerings boost its sales and profits.
Tesla’s market capitalization of US$574 billion, more than the combined value of General Motors, Ford and Toyota, is increasingly moving away from its core electric vehicle business.
Less than half of the company’s market capitalization is now in the automotive business, according to Chris McNally, an analyst at Evercore ISI. A different analysis by Nicholas Colas of DataTrek Research showed that nearly 80% of the company’s stock price is based on future growth potential.
Competition is also intensifying in the area of autonomous driving. The combination of these factors unfavorable to Tesla and the high valuation of the stock shows the immense value that investors attach to Mr. Musk.
“Tesla is a faith-based stock,” said Steve Sosnick, chief strategist at Interactive Brokers. “It’s really about investors’ faith in Elon Musk’s ability to come up with visionary ideas. And for most of this company’s history, that faith has been richly rewarded. »
With the collaboration of Subrat Patnaik