Tesla Q3 24 – Irrational Exuberance

By its own standard, the shares should be falling.

• Tesla reported excellent results and guidance but given the valuation of the shares and how the company sees itself going forward, the shares should be falling not rising.
• Q3 24 Revenues / Adj-EPS were $21.6bn / $0.79 ahead of forecasts of $25.5bn / $0.59 and Mr Musk was very bullish for the coming year.
• Here, he said that his “best guess” for 2025 was 20% to 30% growth YoY compared to consensus of 17% YoY.
• This was taken with a sigh of relief following the disappointing robotaxi launch (see here), and increasing concerns with regard to the speed and degree of Chinese competition in non-US markets.
• The relief sent the shares up 21% in yet another sign of just how much Tesla’s shares are disconnected from the reality of the fact that it is a car company as opposed to an AI company.
• Q3 24 gross margins of 19% (which were better than expected) clearly underline my position that this company makes money from metal boxes, not AI algorithms.
• To compound matters further, the company openly states that anyone who does not believe that Tesla will be a powerful force in the robotaxi business should not be an investor in the company.
• By this standard, the current rally in the share price and the valuation overall makes no sense whatsoever.
• The shares have rallied because Mr Musk says he will sell more metal boxes next year than people thought, but according to the company selling metal boxes is not the reason to own the company, autonomous driving is.
• The event a couple of weeks ago was disappointing and nothing has changed since then meaning that the outlook for Tesla’s robotaxi has also not changed.
• Here, I remain as sceptical today as the day when the business model was first announced as it continues to make no sense.
• Tesla’s contention is that it will be able to charge $1 per mile for a robotaxi service (which with a human costs $2 per mile) and because it has removed the human, the cost to Tesla will be $0.2 per mile.
• I have previously agreed with Tesla’s cost estimate for the cost of robotaxi service but its reduction to $0.2 is a step too far for me especially as the purchasing power of the $ has declined by 30% or more over the last 3 years (see here).
• This would give a gross margin of $0.8 per mile and if this holds, then one can quickly see how Tesla could generate massive profits from this business.
• However, as always, the devil is in the details and this business model is no different because to work, it will need to have the market to itself with no competition.
• This implies that Tesla will be first to market with the only working solution, but all of the available evidence points to the fact that Tesla does not have a leading solution but is middle-of-the-road at best.
• This, in turn, means that when Tesla robotaxis finally comes to market, it won’t have the market to itself but will instead face a cutthroat market with brutal competition.
• Hence the price will not be $1 per mile but something closer to $0.4 with gross margins of maybe 20%.
• The net result is that Tesla is overestimating the size of the revenue opportunity by 2 or 3 orders of magnitude and its market share by a similar amount.
• This is why I continue to argue that the share price remains substantially overvalued and that ascribing any real value to the robotaxi business is a dangerous business.
• There is nothing wrong with Tesla as a company and I would be quite happy to own one of its vehicles if its interiors were better but wild horses would not drag me to own the shares.