Tesla May Melt Down To ~$90 As Fundamentals Tank And Bitcoin Correlation Flips (TSLA) (2024)

My Fundamental View On Tesla Remains Bearish ...

Heading into 2024, I argued strongly that the selloff in Tesla, Inc. (NASDAQ:TSLA) shares was set to accelerate, as I pointed out multiple fundamental headwinds for the world's leading electric vehicle ("EV") company. Specifically, I pointed out four core arguments: Firstly, on a macro level I highlighted a general downturn in the electric vehicle market, with sales numbers in 2023 failing to meet high growth expectations. Secondly, I voiced concern on increased competition from Chinese EV manufacturers like BYD Company (OTCPK:BYDDF), which are experiencing rising demand both domestically and internationally. Thirdly, I discussed the negative margin impact of Tesla's updated pricing strategy, as well as pressure from uptrending labor costs in the U.S. Lastly, I pointed to challenges such as fading investor trust, exacerbated by Elon Musk's statements on needing new incentives for AI technology development and the news of Hertz rebalancing its fleet towards internal combustion engine vehicles.

I concluded:

While I expect Tesla to report Q4 2023 results broadly in line with consensus estimates, referencing $25.75 billion in revenues and 0.75 cents EPS, I see a large downside risk for commentary on 2024 guidance.

Indeed, Tesla's Q4 results were reported closely in line with consensus expectations, with $25.2 billion in quarterly sales and 71 cents of earnings, while the guidance for 2024 crushed bullish hopes. In the Q4 reporting, Tesla management highlighted that volume growth in 2024 is expected to be "notably lower" compared to 2023, likely suggesting that delivery growth will drop to 10-15% YoY in 2024. Needless to say, this is much lower than Elon Musk's bullish expectations of a long-term 50% delivery CAGR set in late 2020. Meanwhile, as the volume tailwind is fading, the growth thesis is also struggling with little upside on pricing.

As a consequence, and in line with my thesis, Tesla's selloff in early 2024 did accelerate: Since the start of the year, TSLA shares are down about 33%, compared to a bullish 9% gain for the S&P 500 (SP500).

... As Q1 2024 Deliveries Badly Miss Expectations

As I expected, the negative Q4 2023 momentum has been carried into Q1 2024. On April 2nd Tesla reported production and deliveries number for the Q1 quarter, badly missing consensus expectations and revealing the first YoY drop in delivery volume since the early quarters of the Covid pandemic. During the period from January to end of March, Tesla delivered only ~387,000 units, down 9% YoY compared to the same quarter in 2023. Compared to consensus expectations, Tesla's delivery numbers missed by 40,000-45,000 units, according to data compiled by Refinitiv.

While Tesla argued that decline in volume was partially due to supply chain disruptions (emphasis added) ...

Decline in volumes was partially due to the early phase of the production ramp of the updated Model 3 at our Fremont factory and factory shutdowns resulting from shipping diversions caused by the Red Sea conflict and an arson attack at Gigafactory Berlin.

... I would point out that the deliveries miss looks more like a demand-side problem than a supply-side problem. Specifically, I highlight that as a consequence of the production vs. deliveries mismatch, Tesla has reportedly started to selectively, but aggressively cut prices (again).

If the deliveries miss would have indeed been due to supply constraint, than prices should have increase, as buyers would try to push through limited supply. On price cuts, TechCrunch noted (emphasis mine):

Many long-range and performance Model Ys are now selling for $5,000 less than their original price, while rear-wheel drive versions are seeing even bigger cuts of more than $7,000.

The discounts come as Tesla once again made far more vehicles than it sold in the last quarter. The company built 433,371 vehicles in the first quarter but only shipped 386,810, likely adding more than 40,000 EVs to its inventory glut. (Some of those vehicles were likely in transit, though Tesla didn’t say how many.) The company has built more cars than it shipped in seven of the last eight quarters, Bloomberg News noted Friday.

Meanwhile, also Tesla's energy generation and storage business appears to be struggling to preserve high growth rates: In Q1, Tesla deployed 4,053 megawatts, an increase of only 4% YoY.

Anchored on lower YoY car volume of (-9%), paired with an estimated YoY reduction in ASP of (-5)-(-10)%, I now model that Tesla's Q1 sales numbers will likely fall somewhere between $22-23 billion. Tesla's EBIT will depend on how well Tesla managed inflationary pressure and OPEX discipline (R&D spending on full self-driving, or FSD). Anyways, pointing to the production/ deliveries mismatch, Tesla's Q1 2024 EBIT will highly likely fall towards $1 billion, vs. $2.6 billion in Q1 2023.

Looking Through The Noise

Shortly after the disappointing Q1 2024 deliveries, news broke that Tesla has reportedly cut its plans to develop/ produce a low-cost car. And while CEO Elon Musk has been quick to contest the news, I highlight that the reporting by Reuters has been quite specific, and thus credible (see below).

On April 5th, and likely as a counter-balance to the negative news flow relating to the low-cost car model, Elon Musk boldly announced through his personal X/ Twitter account that Tesla will unveil its Robotaxi product on August 8th. This prompted shares to trade higher by almost 4% in aftermarket trading activity.

However, investors should consider that Elon Musk has already teased the possibility of Robotaxis within one year as early as 2019. In addition, investors should note that "unveil" events do not indicate an imminent commercial launch of a new product. Thus, I am neutral on the implied commercial perspective for Tesla Robotaxis until proven otherwise.

Fundamental Pressure Compounded By Negative Risk-On Correlation

My overarching, negative fundamental thesis on Tesla as highlighted in my earlier report persists. But on top of this, today I now also point out an additional, highly concerning insight on the Tesla thesis. Specifically, I highlight that for the first time since COVID, Tesla stock correlation with risk-on sentiment has turned negative. To prove this, I have modelled a correlation analysis of Tesla shares with the Nasdaq 100-Index (NDX) and Bitcoin (BTC-USD) over the past 3 years.

To establish the relevance of the Nasdaq 100 and Bitcoin as risk-on benchmarks, it is important to note that the technology sector (Nasdaq 100) and Crypto are seen as frontiers of innovation. This innovative aspect can be particularly appealing during "risk-on" periods when investors are searching for breakthrough investments that could yield high returns. Historically, both the Nasdaq 100 and Bitcoin have seen periods of significant, outsized price swings compared to the S&P 500, or the Dow Jones Index. For context, the Nasdaq 100 and Bitcoin have a beta vs. the S&P 500 of 1.1-1.3 and 1.3-1.8, respectively.

With that frame of reference, I have mapped the annual correlation of Tesla with both Bitcoin and Nasdaq 100 (QQQ) prices. For context, as a general rule of thumb:

• Very weak correlation: 0.0 to 0.2
• Weak correlation: 0.2 to 0.4
• Moderate correlation: 0.4 to 0.6
• Strong correlation: 0.6 to 0.8
• Very strong correlation: 0.8 to 1.

On Bitcoin, I point out that that the TSLA x BTC correlation over the past 3 years overall has been 0.75 (strong correlation). However, correlation flipped negative, to -0.65 in 2024 YTD (strong negative correlation).

An even stronger correlation pattern is evident when mapping TSLA x QQQ: Over the past 3 years, correlation between the two assets has been 0.83 (very strong correlation); but the metric flipped aggressively in 2024 YTD, to -0.9 in 2024 (very strong negative correlation).

The correlation flip for Tesla vs. risk-on assets is a major bearish inflection, in my view, and the implication on this can hardly be understated. Investors should note that my analysis implies that Tesla's stock is now reacting very differently to market sentiment compared to the past, diverging from its previous alignment with risk-on behavior. This could suggest that Tesla has lost the benefit of optimistic investor perception, which shielded shares from negativity.

Accordingly, with the sentiment tailwind failing to give support, Tesla may now be fully exposed to the company's fundamental weakness heading into 2024, pointing to arguments highlighted in the intro section of this article. What more, I see a very likely scenario where investors begin (short)selling Tesla shares to finance participation in more dynamic momentum related to (Gen)AI investments. In fact, that is a strategy that I have been pursuing over the past few weeks.

TSLA Shares Could Be Heading As Low As 20x EV/EBIT

Without the positive sentiment backdrop that carried Tesla's sky-high valuation for multiple years, the stock could be vulnerable for a sharp rerating, potentially trading down to the valuation of a typical GARP asset. On that note, I view a ~$90/ share as reasonable, projecting a EV/EBIT of around ~30x. This would be a valuation similar to the price multiple seen in Microsoft (MSFT) and Nvidia (NVDA) shares. However, assuming the lower end the GARP spectrum as the target, Tesla shares could trade as low as ~20x EV/EBIT valuation. This is an approximate price multiple seen for Meta Platforms (META), Google (GOOGL), and would suggest a target price for Tesla as low as ~$60 (my bear case).

Investor Takeaway

Tesla's selloff is expected to continue, as the company is facing headwinds such as a downturn in the EV market and increased competition from Chinese manufacturers. On that note, Tesla's Q1 2024 performance continued the negative momentum from Q4 2023, with a YoY drop in Q1 delivery volumes of 9%, missing consensus expectations by 40,000-45,000 units. The shortfall in deliveries suggests an even deeper than previously expected demand-side issue, potentially bringing Q1 sales to $22-23 billion (-3-6% YoY) and EBIT to $1 billion (-60% YoY).

Adding to the fundamental weakness, I highlight that for the first time since COVID, Tesla stock correlation with risk-on sentiment has turned negative. The correlation flip is a major bearish inflection and suggests that Tesla has finally lost the benefit of optimistic investor perception, which shielded shares from negativity in the past.

Without the positive sentiment that carried Tesla's sky-high valuation for multiple years, the stock could be vulnerable for a sharp rerating, potentially trading down to the valuation of a typical GARP asset. I view a ~$90/ share as reasonable, projecting a EV/EBIT of around ~30x. This would be a valuation similar to the price multiple seen in Microsoft and Nvidia shares. In line with my correlation analysis and fundamental view on Tesla, I am downgrading shares to a "Strong Sell."

Cavenagh Research