On Monday, shares of Tesla Inc. (TSLA, Financial) dropped more than 8% following a worse-than-expected third-quarter production and deliveries report as well as a lukewarm response to its highly anticipated AI Day 2022. At $243.11 per share as of midday trading, the stock was trading a price-earnings ratio of 87.38, which is much lower than its historical median valuation.
However, just trading below historical levels does not necessarily make a stock cheap. As Tesla’s third-quarter troubles show, it is not immune to the supply chain issues that other automakers are experiencing right now. It is also going through some growing pains as it enforces a strict shift to an in-office-only work environment. Combining this with many investors and commentators being disappointed in its AI Day 2022 presentation, could Tesla’s stock be in for a steeper correction in the months ahead?
Third-quarter deliveries fail to impress
Tesla reported its third-quarter 2022 vehicle production and delivery numbers on Sunday, making huge progress year over year, but deliveries still fell short of what analysts had been hoping for.
Total production for the quarter was 365,000 units, while deliveries numbered 343,000 units. According to Street Account, analysts had been anticipating deliveries of 364,660 units. Breaking the numbers down by vehicle type, Tesla produced 19,935 of its higher priced Model S and X vehicles and 345,988 of the more popular Model 3 and Y vehicles.
In the same quarter of 2021, the company produced 237,823 units, while deliveries totaled 241,300 units. In the first quarter of 2022, Tesla produced 305,407 units and delivered 310,048 units.
Thus, while year-over-year growth was quite impressive, it did not stand up to what the market had already been factoring into the share price. According to the GuruFocus discounted cash flow calculator, in order to be worth its current share price in the long run (keep in mind this is after an 8% price decline on Monday), the company will need to grow its earnings by 34% per year for the next 10 years. That is assuming a 10% discount rate.
Tesla is not immune to supply chain and labor issues
While Tesla has gained positive press for managing to secure its supply chains better than many other automakers and technology companies alike, that does not mean it was immune to supply struggles. Aside from Covid-19 lockdowns in China, Tesla also had to suspend most of its Shanghai factory production briefly to make upgrades, though it was back up and running by August.
This small operational hiccup was just a drop in the bucket, however, compared to soaring materials costs. Even if Tesla can secure supplies of key battery materials, there really is not much that it can do about the price it will have to pay for these materials. According to Insider Intelligence, the cost of key minerals used in EV batteries, such as cobalt, nickel and lithium, was about $8,255 per vehicle as of mid-2022, up 140% from $3,381 in March 2020.
On the labor side, Tesla’s decision to implement an office-only policy limits the talent pool that it can draw from. With the rise of remote work, some tech workers have decided that only fully or partially remote jobs are for them. Moreover, Tesla CEO Elon Musk mandated even workers that were originally remote needed to relocate so they could transition to being in the office full-time. Those that did not wish to relocate were fired, and those that did found there simply was not enough office space for all of them.
It's possible that the strict office-only policy was partially meant as an easy way to reduce employee headcount as Tesla struggled to cut costs, but still, it is not a good sign when a multibillion-dollar company does not even have enough office supplies for all of its employees.
In the longer term, there are concerns that Tesla could have trouble recruiting top talent with its office-only policy. Before the Covid-19 pandemic, only about 19% of engineers were working remotely, but by the time 2021 was halfway through, approximately 86% of engineers in North America were remote workers, according to the 2021 State of Remote Engineering Report conducted by Terminal.
This survey did also show that 58% of survey participants missed day-to-day interaction with coworkers, while 39% said it was harder to collaborate or feel like a team. Despite the drawbacks of remote work, those who prefer it say benefits include increased productivity and better work-life balance. Overall, the study results showed the remote versus in-office debate really depends on the individual worker, which means there is a good chance Tesla’s office policy could hurt its talent recruitment outlook.
AI Day viewers proved tough to impress
Tesla held its second annual AI Day on Friday. While this event was geared toward recruiting artificial intelligence and robotics engineers and was highly technical, investors and analysts also tuned in to glean what they could on the company’s future.
It started off with a much-anticipated demo of the latest version of Tesla’s humanoid robot, Optimus. The robot waved and slowly walked across stage, and while it still had many exposed parts and did not show off an ability to perform complex tasks, Tesla did provide some direction on what it envisions for the robot’s future.
Optimus is not mean to be a top-of-the-engineering-world masterpiece; it is meant to be mass-produced, with Musk claiming that it is expected to cost less than one of its cars at around $20,000. The company’s goal is to have the battery-powered robot be able to handle complex chores, including heavy lifting, as well as some conversational capabilities. The robot might also end up being put to use in Tesla’s factories to make cars more efficiently.
While this type of robot does have potential, it does not have the same ability to wow audiences as famous humanoid robots such as Boston Dynamics’ Atlas and China’s first humanoid robot Jia Jia. What was missing was an area in which Optimus was uniquely impressive.
However, AI Day quickly moved on to areas where Tesla is uniquely impressive, such as its driver-assistance technology, which continues collecting massive amounts of data from the cameras in Tesla cars to improve driver assistance with the goal of eventually enabling full self-driving in more complex city streets rather than being limited to well-marked highways.
The highlight was the unveiling of the latest version of Tesla’s Dojo supercomputer, which is so powerful that it reportedly tripped the Palo Alto power grid. Built from the ground up for AI machine learning, the supercomputer uses chips and infrastructure designed by Tesla, and it is expected to supercharge Tesla’s capacity to train neural nets using video data.
Tesla boasts that it can replace six GPU boxes with a single Dojo tile. There are six of those tiles per tray and, according to the company, a single tray is the equivalent of “three to four fully-loaded supercomputer racks.”
Takeaway
Even though Tesla is still in growth mode, continuing to ramp up EV production and deliveries at an incredible pace, its progress has been hampered by unfavorable economic conditions, sending mixed messages to investors and disappointing analysts.
When it comes to the strides made by Tesla’s AI and robotics projects, investors are proving tough to impress as the market turns bearish on things that are not currently producing cash flows. Those who found themselves disappointed by Tesla’s AI Day had been hoping for the best of the best.
At this point in the market cycle, it seems likely that Tesla’s stock will remain depressed and could even see further declines as long as it performs worse than expected, even if that “worse” still represents significant growth.
