In light of first-quarter results, even the most optimistic analysts covering Tesla had anticipated disappointing figures, a sentiment hinted at with poor delivery reports in early April. However, the results announced after the market close on April 22 were considerably worse than anticipated.
Automotive sales experienced a significant decline, dropping 20% compared to the same period the previous year, amounting to $14 billion. Despite the year-long growth in Tesla’s industrial and residential battery storage sector, overall revenues decreased by 9%. This decline in sales impacted profitability, resulting in net income plummeting by nearly 40% to a modest $409 million, significantly lower than the Wall Street prediction of over $600 million, and a fraction of the earnings reported as recently as the second quarter of 2023.
Given such an underperformance relative to the consensus, a drop in stock prices is typically expected. Yet, Elon Musk employed strategic showmanship to salvage the situation. During a conference call, he announced that he would begin allocating more time to Tesla in May, stepping back from his role as a spending advisor within the Department of Energy. Musk also shifted investor focus from the disappointing financial results to future prospects, revealing plans for the release of a long-awaited version of the Model Y sports vehicle later this year and the introduction of Tesla robotaxis in Austin by 2026.
As a result, by the end of trading on April 24, Tesla shares had risen 9% from their pre-Q1 report level, reaching $260. In that short period, Tesla increased its market capitalization by $67 billion, raising its valuation to $836 billion.
However, this stock increase seemed striking given Tesla’s valuation appeared excessively inflated even before this unexpected spike. The reasoning behind this is pertinent.
In the preceding quarter, Tesla experienced losses in what can be deemed its core businesses. The manufacturing activities in Austin, Berlin, and Shanghai only illustrate a small portion of its valuation, and their fortunes are declining swiftly. The remainder of the valuation, further inflated despite the Q1 performance issues, might be termed the “Musk Hope Premium.”
Following the somewhat lacking fourth quarter report, an analysis was introduced to evaluate Tesla’s ongoing, fundamental earnings from its existing businesses, predominantly cars and batteries, alongside a small services unit. This involved excluding one-time gains, such as substantial tax benefits from the last quarter of 2023 and the non-monetary profit from a $600 million write-up of its Bitcoin holdings in Q4. Also excluded were earnings from the sale of regulatory credits to competing automakers, a benefit believed by Musk to be temporary, though its cessation timeline remains uncertain.
These adjustments provided a view of Tesla’s "hardcore" profits, highlighting how much of its substantial market cap is based on current performance versus potential future growth as promised by Musk. In particular, the CEO has made assurances regarding fully autonomous driving technology and a commercial robotaxi network. Yet, these promises have remained elusive.
Calculations adjusted for these factors yielded a net earning of $409 million. After subtracting profits from regulatory credit sales, a result of $433 million was observed, encompassing over 100% of total profits. By this analysis, Tesla ostensibly lost $13 million on car and battery production and sales in Q1, marking the first instance of such a loss since 2020.
Over the past four quarters, Tesla’s "hardcore" earnings sum to $3.5 billion, leading to an adjusted price-to-earnings ratio of 240, based on the $836 billion valuation divided by the $3.5 billion profit figure. Notably, at its peak in 2022, Tesla’s "hardcore number" for the year stood near $12 billion, three times its achievement over the last year.
If a generous price-to-earnings ratio of 20 is attributed to the car-battery segment, twice the industry average globally, the value of Tesla’s current operations amounts to $70 billion, leaving a $766 billion difference predicated on optimistic projections for Musk’s delivery of unprecedented growth in earnings.
For an expected 10% return from this point, Tesla’s stock would need to rise from $260 to $520 within seven years, implying a doubling of market capitalization to over $1.6 trillion. Assuming another generous 30 P/E forecast, net earnings required would exceed $50 billion. Relying on existing products, this target seems unattainable; Tesla would need to generate earnings equivalent to half of what Apple currently achieves on projects still in their nascent stages.
Once more, it appears Musk is diverting investor attention. The press release regarding Q1 attributed the poor performance to “uncertainty in the automotive and energy markets” exacerbated by shifting trade policies impacting global supply chains and pricing structures. Simply put, Tesla hinted at impacts stemming from policies under Musk’s superior in the White House.
The strategy Musk employs resembles that of Harold Hill from the film musical The Music Man, who charmed a town with promises that remained perpetually out of reach. Musk’s ability to engage and inspire investors rivals that of the fictitious salesman.
This analysis originally appeared on Fortune.com.
