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These are intoxicating times for Tesla (NASDAQ: TSLA) investors. After all, the stock has risen by nearly 600% in the year. The enthusiasm for its major electric vehicles has catapulted Tesla to become one of the most valuable companies in the entire stock market. Reports that Tesla will be added to the S&P 500 index in December are responsible for the stock’s recent rise, but that’s just the latest in a string of great news.
However, with Tesla’s market cap standing at over $ 560 billion, Elon Musk himself may be increasingly nervous about the skyrocketing price of his shares. He expressed his concerns to employees in a recently leaked internal email.
Image source: Getty Images.
“Our stock will be crushed immediately”
In the email, Musk asked employees to redouble their cost-saving efforts to bolster Tesla’s profitability. Right now, the market is giving Tesla a huge advantage of doubt that it will not only grow a lot, but it will also reach margins more like the software industry than the automotive one.
Next year, analysts expect Tesla to increase revenue by just under 50%, but expect earnings per share to grow a further 72%. This means that a series of margin growth and expansion is built into the share price.
Now that the company has hit profitability over the past year, Musk seems keenly aware that showing investors increased profits will be key to avoiding disappointments that could lead to a huge sell-off in Tesla stock. According to his internal email to employees:
If you look at our actual profitability, it’s very low, around 1% in the last year. Investors give us a lot of credit for future profits, but if, at any point, they conclude that it won’t, our shares will immediately be squashed like a souffle under a sledgehammer!
For Tesla stock holders, this isn’t good to hear. However, Musk has also said in the past that Tesla’s share price is too high and that hasn’t stopped it from rising further.
Tesla must continue to cut costs to provide a cheaper car. Image source: Tesla.
Because Musk is so cost-focused right now
Musk is certainly right to focus on continuing cost reduction, and not just for the sake of the current year’s profits. Musk probably knows that in order to sell the volumes of vehicles he wants and the market expects, Tesla will likely have to continue lowering the price of the Model 3. Currently, the Model 3 costs around $ 38,000. This is before other add-ons that can easily push 3 models up to $ 50,000 or more.
It’s still too expensive for a mass market vehicle, even with a gas saver. Tesla recently outlined a goal of selling its low-cost models for $ 25,000 over the next three years. The new vehicle would be enabled by better battery cell technology that reduces the cost of the EV battery, but it’s still really, really hard to do.
According to this recent internal email, however, Musk is apparently doubling down on the frugal cost ethics beyond even new drum designs:
Much more important, to make our cars affordable, we need to get smarter about how to spend money. This is a tough game to spend, requiring thousands of good ideas to improve the cost of parts, a manufacturing process, or just design, while increasing quality and capabilities. A great idea would be the one that saves $ 5, but the vast majority are 50 cents here or 20 cents there.
Is it encouraging or worrying?
The recent email could be an encouraging or worrying signal for investors. It could be concerning as Musk may realize that Tesla cannot meet Wall Street’s high margin expectations with its current cost structure and technology.
On the other hand, it could also be encouraging that Musk is rallying troops around this initiative. Under Musk’s leadership, Tesla has already pulled itself out of deep holes. He has achieved goals that many believed impossible.
If the recent call to arms produces major breakthroughs in terms of cost, that could be good. It would be much better for a CEO to tackle problems head-on than ignore them and let the company fall behind.
But the current stock price is already taking on all kinds of good news
Soon after Tesla was included in the S&P, well-known value investor Michael Burry, one of the profiled investors The great short, revealed that he was going out for Tesla stock. This could be a worrying sign that Tesla’s stock is finally at its peak. Many other value-oriented investors have exposed Tesla in the past, all of whom have lost a lot of money on that bet against the company. However, it’s hard to argue with Burry’s claim that Tesla’s stock is incredibly expensive right now, as the market is pricing all sorts of good news for EVs into the future.
To stay invested in Tesla at these levels despite Musk’s concerns and Burry’s short, you really have to believe that Tesla will continue to dominate the auto industry, while also moving to other energy products with large markets and high margins. It’s fun for me to watch from the sidelines, but Tesla remains too rich for my blood.
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