I’ve been covering Tesla Inc. (NASDAQ: Tesla) I have been buying stocks on Seeking Alpha since October 2021 and my conclusions have fluctuated between “buy” and “sell”, with the last 4 times coming to a negative conclusion. Data keeps piling up, Companies are reporting their new results and corporate actions, and the macroeconomics are flowing, so I feel it’s important to share information with you that may be difficult to find elsewhere.
For example, those who regularly follow the company know that analysts at Morgan Stanley (MS) recently issued a report in which Adam Jonas et al. The stock has an Overweight rating and a price target raised to $400 from $250, providing additional momentum to the market for TSLA.
The main reason for the upgrade is the new Dojo system, which analysts believe will add as much as $500 billion Enter the TSLA market in the foreseeable future.
Well, I invite you to join me in taking a look at the premises of the analyst’s assumptions and decide for yourself how close they are to reality.
Tesla’s Dojo and its impact
First, let’s define Dojo. It is a computer hardware and software system designed to quickly and efficiently process large amounts of data and train artificial intelligence algorithms, helping Tesla improve the capabilities of its Autopilot and Full Self-Driving (FSD) systems.
Morgan Stanley wrote that Dojo could save Tesla about $6.5 billion by fiscal 2024, but MS acknowledged that this claim has not yet been confirmed because Dojo’s rollout is still in its early stages. The system can also accelerate the monetization of vehicle software, leading to higher revenue. Driven by increases in fleet licensing and revenue per user, network services could reach $335 billion by fiscal 2040, accounting for a significant portion of Tesla’s revenue. Dojo’s value is also tied to Tesla Mobility’s robotaxi and third-party battery businesses.
In many ways, the estimates that influence Morgan Stanley’s ratings come from the firm’s forecasts, not the bank’s own.
Morgan Stanley’s research repeatedly points out that Dojo is a relatively new technology and it will be some time before we see how it works in practice. Especially when it’s applied to a company’s large-scale operations.
In a meeting with Martin Vicha [TSLA’s VP IR]Another big investment bank, Goldman Sachs, concluded that the company still has a lot of work to do to make Dojo work [proprietary source]. Furthermore, “FSD on any vehicle” seems to be a long way off, at least for now.
During the second quarter 2023 earnings call, Elon Musk mentioned that Tesla will invest more than $1 billion in Dojo’s research and development next year (the outlook includes all related expenses). On a TTM basis, it accounts for over 30% of Tesla’s overall R&D to date, which is a huge number (meaning a major manufacturing company needs a ton of other research projects, no matter what anyone says).
In my opinion, although Tesla has very interesting prospects with its new Dojo, Morgan Stanley is rushing: the real effect of introducing this technology is still far from enough to say how many billions it can add to the already Dollar. The company’s valuation is high.
Looking at recent operating margin performance, I think investors should take a look at Tesla’s core business and its health before jumping on the AI bandwagon following Microsoft’s suggestion.
Focus on core business first
How do analysts change their forecasts for core parts of a company’s business? Well, as far as I know, very positive or neutral:
There are no changes to our assumptions about Tesla Energy or Tesla Insurance. The modest increase in core automotive business value ($7 per share) is primarily related to an increase in our exit EBITDA multiple assumption to 13x from 12x previously. Our near-term (FY23/FY24) core auto sales and gross margin/operating margin assumptions remain unchanged.
Core Auto: We now value Core Auto at $102/share, compared to $95/share previously. Our unit and ATP forecasts remain unchanged across our forecast horizon, and we now forecast slightly higher EBITDA margins in the outside years, partially offset by slightly lower automotive gross margins and slightly higher long-term capex. Our fiscal 2030 EBITDA (GAAP) margin was 17.4%, compared with 16.6% previously; Automotive GP margin is now 17.4%, compared with 17.7% previously, capital expenditures as a percentage of sales were 6.9%, compared with 6.5% previously. Additionally, we increased our exit EV/EBITDA multiple to 13x from 12x previously. At $102 per share, the automotive business trades at 15.0x our fiscal 2025 automotive EBITDA (previously 14.1x).
Source: Morgan Stanley report, author’s emphasis added.
I don’t know about you, but to me, raising EBITDA margin forecasts against the backdrop of declining gross margins seems like a pretty illogical move. Additional inputs out of EV/EBITDA multiple expansion add to the instability of this forecast, which I believe makes MS’s conclusion more susceptible to any possible headwinds.
The reality today, rather than a prediction for the next 10 years, is that Tesla is most aggressively lowering the prices of its cars, hypothetically trying to a) protect its internal sales targets and b) capture more global market share:
But something tells me Tesla isn’t going to stop existing price cuts and incentives. Why?
Mannheim’s index of used car values has begun to adjust downward as inflation falls, making used cars increasingly cheaper and taking away carmakers’ share of the overall demand-side pie.
AI initiatives are great, but they won’t play a key role in protecting the demand side for the foreseeable future. I’ve written before that the situation for consumers in the United States and much of the world is pretty dire: Prices that have risen over the past two years are unlikely to come down, and wage growth is limited by business conditions, which should theoretically lead to continued economic stagnation.
I think the market is tired of the constant narrative about how bad everything is, so it’s buying into the pullbacks in risk assets without noticing the obvious. Our brains always try to stay optimistic because it’s easier emotionally.Lately, this reason for optimism has been readily accepted by the public [AI narrative] – This partly explains why TSLA is up so much compared to the rest of the industry:
I don’t mean to discount the merits of this company – the way they maintain market share and continue to grow is amazing.But optimistic descriptions of the company’s AI plans appear to be overblown, as the technology is still a long way from being commercialized in the real world. [as far as I got it]. There will be months of millions of dollars in R&D and capex spending leading up to that moment, and this aggressive approach to lowering the prices of the company’s products won’t help margin sustainability.
Overall, I expect Tesla stock to continue falling as the AI hype dissipates in real time. In my opinion, investors’ long-term entry target is in the 25-30x EV/EBITDA range, which is about 43% below current multiples [in the middle of the range].
thanks for reading!