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Tesla's stock valuation is disconnected from its cash flow and growth prospects, driven by overdone positive sentiment from Trump's pro-energy and trade policies.
Despite domestic advantages, Tesla struggles globally, with declining sales in China and increasing competition from BYD, which is expanding into new markets.
Tesla's high valuation metrics, such as a P/FCF of 388, are unsustainable compared to BYD's more reasonable valuation and superior cash flow generation.
Investors' optimism in Tesla is misplaced due to troubling growth prospects, serious valuation concerns, and rapidly developing competition from more cost-effective rivals like BYD.
Behind Tesla's Skyrocketing Valuation
Tesla stock recently hit all-time highs, skyrocketing over 70% following Trump's election. I now strongly believe the stock is trading at a level disconnected from its cash flow, growth prospects, and economic landscape.
Admittedly, a Trump administration is a bullish condition for Tesla. The synergy is clear: Tesla manufactures all its cars in the United States, while many of its competitors have factories in Mexico. Trump’s tariffs will also continue to shield Tesla from the greatest EV maker in the world, the Chinese BYD. Another more implicit result of Trump's election is his very pro-energy agenda. As he deregulates and subsidizes oil drilling, traditional energy will become abundant and cheaper, putting more pressure on costly electric vehicle makers.
Trump has also vowed to remove the $7500 tax credit currently available for EV buyers. This is critical for most EV producers in the U.S. Tesla is unique because it is the only electric car maker making a profit, implying it has more room in its margins for discouraged customers. Another tailwind for Tesla could be potential deregulation in the Full Self Driving (FSD) environment, where Tesla is a clear leader and stands to gain the most.
Trump has also begun to influence the landscape of foreign trade and by extension EVs. Mexico has notoriously become a loophole for importers with heavy American trade barriers to dodge expensive tariffs. As a result, it is presumed that Trump will withhold his approval for the renewal of the United States-Mexico-Canada Agreement (USMCA) and has even threatened to attempt to enforce tariffs as high as 25% on Canada and Mexico. The statements allegedly delayed the construction of a pending BYD factory in Mexico. BYD is the largest EV maker in the world and Tesla's largest competitor.
These policy changes serve to create an artificial economic moat for Tesla, as the barriers to entry in the EV market will quickly become bolstered. If implemented, Elon's EV company could effectively become an American EV monopoly. This is already evidenced by Tesla recently raising prices of their Model S series by $5000 only in the U.S.
Growth, Valuation, and Alternatives
Now that I’ve outlined what the bull case for Tesla is, let's begin to unmask it.
Firstly, we must make it clear that while the election is a good thing for Tesla’s domestic operations, globally there’s a different story. Outside of the US Tesla isn’t as dominant or sheltered from innovative competition. While still the global leader, that narrative has been shifting, and as industrial rhetoric evolves domestically, foreign nations are imposing corresponding trade penalties on American EVs.
In China, representing 21.6% of Tesla’s EV sales, deliveries were down 4.3% YoY in November. China is responsible for 60% of EV registrations, more than Europe and the U.S. combined (25% and 10% respectively). EV makers cannot afford to lose in the Chinese market.
In fact, Tesla has seen its primary business as a whole deteriorate over the last few quarters, with revenue growth shrinking in 2023 and 2024. Contrary to what bulls will tell you, while Tesla’s top line certainly hasn’t shrunk at the rate earnings have, they are beginning to stall.
In Q1 of 2024, auto sales were up only 7% on a TTM basis as opposed to Q3 and Q4 of 2023 where sales were up 15% and 24% respectively. Sales shrunk by -3.43% in Q2 and -4.03% in Q3 of 2024.
As for Tesla’s archrival, BYD, sales are hitting new records. BYD reported 67.9% growth in deliveries in November, selling 506,804 EVs. The Chinese auto-maker is also having immediate success as it diversifies its geographical revenue segments. With tensions growing in European and U.S. trade policy, BYD has moved into alternative markets, building factories in Thailand, Brazil, Indonesia, Hungary, and Uzbekistan.
The move targets friendlier nations that don’t have domestic auto manufacturers and are therefore less likely to pose political risks. The strategy has proved a success so far, with BYD surpassing Toyota in passenger car sales despite beginning operations in Thailand less than a year ago.
While Tesla has been stagnant globally and even domestically to some degree, BYD has been gaining market share little by little. In 2019 BYD represented 11% of the global Battery Electric Vehicles (BEV) industry, in 2023 that had become 15%. In the same period, Tesla grew from 17% to 18% market share.
Tesla has always been an expensive business, and investors learned the hard way in 2022 how quickly pricy shares can slide. However, the positive sentiment from the Trump administration taking office has been overdone. Tesla now trades at a 139.93 FWD PE, and more importantly for a capital-intensive industry like EVs, it trades at an astonishingly high P/FCF of just under 388. That’s an even higher P/FCF than GameStop had at the peak of its 2021 short squeeze. At the time GameStop had a P/FCF of 332.38.
Final Thoughts
Now, there are some risks to BYD’s business as well. The largest as of right now is the general health of the Chinese economy, which has been on shaky ground since its property sector crashed. Despite BYD’s global diversification, China still remains its largest market and the overall largest market for all EVs.
Trump’s policy may also have negative overarching effects on Chinese exports, which remain the lifeblood of its economy. However, the government has issued several stimulus measures, and at least for now, the worst seems to be behind us.
From troubling growth prospects, serious valuation concerns, overdone positive sentiment in a continually precarious political environment, and rapidly developing competition, Tesla shareholders have misplaced their optimism. Where Tesla stands right now is not sustainable or rational, especially in comparison to the cheaper and higher-quality stock and products that BYD offers.
Sources Cited
CNBC. "Tesla Rival BYD Pushes into Emerging Markets amid Western Uncertainty." CNBC, March 19, 2024. https://www.cnbc.com/2024/03/19/tesla-rival-byd-pushes-into-emerging-markets-amid-western-uncertainty.html
Investors Business Daily. "Tesla Rival BYD, Li Auto, Nio, Xpeng, Zeekr: China EV Sales." Investors.com. Accessed December 14, 2024. https://www.investors.com/news/tesla-rival-byd-li-auto-nio-xpeng-zeekr-china-ev-sales/#:~:text=Out%20of%20its%20504%2C003%20passenger,earnings%20for%20the%20third%20quarter
Reuters. "Tesla Raises Prices for Model S Cars in the US by $5,000." Reuters, December 14, 2024. https://www.reuters.com/business/autos-transportation/tesla-raises-prices-model-s-cars-us-by-5000-2024-12-14/
CBS News. "Tesla, Elon Musk, and Donald Trump: What’s Behind the EV Tax Credit?" CBS News. Accessed December 14, 2024. https://www.cbsnews.com/news/tesla-elon-musk-donald-trump-ev-tax-credit/.
Wall Street Journal. "Tesla's China Sales Fall as Competition Heats Up." Accessed December 14, 2024. https://www.wsj.com/business/autos/teslas-china-sales-fall-as-competition-heats-up-b940f08b.
Stock Analysis. "Tesla Stock Overview." Stock Analysis. Accessed December 14, 2024. https://stockanalysis.com/stocks/tsla/
Stock Analysis. "BYD Company Limited (BYDDY) Stock Overview." Stock Analysis. Accessed December 14, 2024. https://stockanalysis.com/quote/otc/BYDDY/