Tesla’s lofty AI dreams have already been baked into tremendous valuations

Shares of electric vehicle maker Nvidia Corp. and Microsoft Corp. – are significantly more expensive than stocks of two mega-cap companies. Still, while earnings estimates are rising for both of these tech giants, they’re falling for Tesla — as EV demand slows.

“Musk has always wanted Tesla to be seen as more than an EV maker, but that works when it comes to growing the core business,” said David Mazza, chief executive officer of Roundhill Investments. A lot is tough, which is why I think the multiple is unrealistic right now, and the stock isn’t cheap even though it’s down a lot this year.”

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Tesla shares trade at 63 times forward earnings at Thursday’s close, compared to Nvidia’s 33 and Microsoft’s 30. And with analyst expectations about Tesla’s profits continuing to fall — especially after a first-quarter report that missed across the board — the valuation multiple is only getting steeper.

Shares have been caught in a free fall for the past week amid panic about Tesla’s growth prospects. But the quarterly earnings call, where Musk made his bold pronouncements about autonomous vehicles and AI, marked a turning point for the stock. Since the results, it has surged more than 24%, helped by news that the company is close to being approved to launch its driver-assistance software in China. On Friday, the stock advanced another 1.8% amid a broader market rally.

But Musk’s focus on this lofty future goal comes at a confusing time for investors. Fully self-driving cars are a technology that most analysts and experts say is likely years, if not decades, away from full-scale commercial adoption. Tesla has been struggling with weak demand for EVs and reported its first quarterly sales decline since 2020. On top of that, it appears to be walking away from projects once seen as a key strategic advantage for the company – such as its charging network.

More importantly, Tesla has offered investors little, other than Musk’s own track record, to show that its efforts to build truly autonomous cars will be more successful than General Motors Co.’s Cruze, which grounded its fleet last year, or Ford Motor company and Volkswagen AG’s Argo AI, which is due to be discontinued in 2022. Tesla plans to unveil its so-called Robotaxis in August.

Read more: Tesla seals deal for China map Musk says cars don’t need

“Fully self-driving may not be a winner-take-all market, and if it is, it’s not clear that Tesla will win,” said Sanford C Bernstein analyst Tony Cecconaghi. Software – which Tesla has begun offering for free trials – Overall, reviews of the software have been mixed.

In contrast, both Nvidia and Microsoft have proven their AI credentials beyond doubt. As a chipmaker, Nvidia dominates the market for accelerators that power data centers running the complex computing tasks required for AI development. Microsoft, with its big bet on OpenAI, is already seeing demand for its AI offerings increase sales and profits.

Tesla’s market capitalization of $574 billion – General Motors Co., Ford Motor Co. And larger than the combined value of Toyota Motor Corp. — becoming increasingly disorganized by its core EV operations. According to Evercore ISI analyst Chris McNally, half of the company’s market capitalization is now based on the auto business. A separate analysis by Nicholas Collas of Datatrack Research shows that about 80% of a company’s share price is based on future growth potential.

Competition is also increasing in the self-driving space. If anything, the combination of these highly-stacked odds against Tesla and the stock’s rich valuation shows the immense value investors attach to Musk.

“Tesla is a belief stock,” said Steve Sosnick, chief strategist at Interactive Brokers. “It’s really about investor confidence in Elon Musk’s ability to deliver visionary ideas. And for most of this company’s history, that trust has lived on richly. rewarded.”

Date of first publication: 06 May 2024, 06:34 AM IST