Share prices of Tesla (NASDAQ: TSLA) are up roughly 21% in five days since it was reported that second-quarter vehicle deliveries beat Wall Street's expectations. However, the electric vehicle (EV) manufacturer's longer-term downward trend remains in effect as it grapples with high interest rates, competition, and other macroeconomic factors.
Could the second-quarter deliveries indicate a sustainable recovery, or will Tesla continue fading out? Let's explore what the next five years could have in store for this innovative EV leader.
Second-quarter deliveries beat expectations -- or did they?
Tesla investors don't have to wait until earnings (expected to be released this month) to get updated on the company's performance. Management typically releases production and delivery data along with other vehicle manufacturers on a quarterly basis (it used to be released monthly). And the much-anticipated second-quarter numbers were no exception.
With 443,956 cars delivered in the second quarter, Tesla beat Wall Street's consensus forecast of 439,000. But this is still down 4.8% from the prior-year period and represents the second consecutive quarter of declining deliveries after a 13% year-over-year drop in the first quarter.
The better-than-expected delivery numbers sparked a double-digit percentage rally in the stock price, but the automaker is not out of the woods yet. The extent of the weakness could be revealed when the company releases its full quarterly report.
Several key problems might come up. First is pricing. Automakers can drive volume growth by lowering prices. But this can come at the expense of revenue per car sold and margins. For Tesla, this could pose a big problem because its previously high margins are the main thing differentiating it from its uninspiring mass-market rivals.
In the first quarter, its operating margins fell from 11.4% to 5.5%. And continued declines could turn the company into just another automaker.
Musk to the rescue?
With a price-to-sales (P/S) multiple of 6.33, its stock trades at a significant premium over the typical large U.S. automaker. For context, Ford Motor Company and General Motors trade for a P/S of just 0.3 and 0.36, respectively. And if Tesla becomes just another car company, it could lose much of its $560 billion valuation. Shareholders are betting that CEO Elon Musk won't let this happen.
Fresh off securing an equity-based pay package worth $44.9 billion, Musk is incentivized to do everything possible to boost the stock price. He seems to be downplaying the automotive opportunity in favor of new growth drivers like robotics and artificial intelligence (AI).
The company is working on Dojo, a supercomputer designed to help train its machine-learning models for full self-driving (FSD). While Tesla isn't the only company tackling this effort, it has some advantages because of the vast amount of user data it can gather from its customers with FSD software installed in their cars. Musk says its robotaxi will be revealed on Aug. 8, along with its next-gen vehicle platform.
If the robotaxis are consumer-ready, they could unlock a new nonautomotive revenue stream for Tesla, while putting it in a prime position to explore other AI uses like warehouse automation or possibly even humanoid robots over the next five years and beyond.
Is the stock a buy?
Tesla has once again become a highly speculative company. If current trends continue, its previously high-margin EV business could become commodified over the next five years amid rising competition and lower pricing power. This isn't enough to justify the stock's forward price-to-earnings (P/E) ratio of 57 compared to the Nasdaq Composite's average P/E of 32.
Investors who buy the stock now are betting on Elon Musk and his ability to transform the company into more than just an automaker through AI and robotics. This is a tall order. And the controversial executive has a track record of overpromising and underdelivering.
With that said, Musk has rescued Tesla from the brink on several occasions, so there is good reason for the market to have some faith in him. The stock looks like a hold pending more information.
