Why Long-Term Investors Should Eye TSLA's Robotaxi Potential

Tesla, Inc. (TSLA) is set to release its second-quarter delivery update in early July, which is expected to show a decline for the second straight quarter. Analysts have adjusted their estimates for TSLA deliveries downward due to concerns over consumer demand and intense competition in China. In January, the company cautioned that delivery growth in 2024 would be “notably lower” as the impact of months-long price cuts diminishes.

According to an average estimate derived from forecasts by 12 analysts polled by LSEG, the EV maker is expected to deliver 438,019 vehicles for the April-June period. Seven of these analysts have slashed their expectations in the past three months.

Further, Barclays analyst Dan Levy revised his deliveries forecast to 415,000 vehicles, marking an 11% year-over-year drop. He stated that “a soft delivery result could turn attention back to the currently challenging fundamental environment for Tesla.” Meanwhile, RBC Capital Markets and UBS have set their delivery estimates at 410,000 and 420,000 vehicles, respectively.

For comparison, Tesla delivered 386,810 vehicles in the first quarter of 2024 and 466,140 vehicles in the second quarter of 2023, with its highest deliveries tally in the fourth quarter of the previous year at 484,507 units.

Despite the anticipated dip in quarterly deliveries, many analysts suggest that investor focus is shifting from quarterly deliveries to TSLA’s long-term projects, particularly the highly anticipated Robotaxi event scheduled later this summer.

High-Profile Robotaxi Event

CEO Elon Musk officially announced on X that the company will unveil its long-promised Robotaxi on August 8, 2024. The upcoming autonomous vehicle will be built on Tesla’s next-generation vehicle platform. Musk has long hinted at the possibility of a Tesla Robotaxi, even showcasing a fully covered vehicle during a 2023 event unveiling the company's third Master Plan.

Musk previously stated that Tesla will eventually produce a car without human control. He further mentioned that Tesla vehicles equipped with Full Self-Driving Capability will, through software updates, continuously improve their driving skills. He also emphasized that Tesla owners could generate income from their autonomous cars by sending them to pick up and drop off passengers.

That would be a part of the “Tesla Network,” as described in Musk’s Master Plan Part Deux. “You will also be able to add your car to the Tesla shared fleet just by tapping a button on the Tesla phone app," he added, “and have it generate income for you while you’re at work or on vacation, significantly offsetting and at times potentially exceeding the monthly loan or lease cost.”

Several years later, Musk’s vision expanded even further. In 2019, he declared, "By the middle of next year, we'll have over a million Tesla cars on the road with Full Self-Driving hardware." He also claimed that Tesla’s Full Self-Driving (FSD) feature would be so dependable that drivers could “go to sleep.” However, it should be noted that Teslas equipped with FSD software are not fully autonomous, and drivers should not sleep while using them.

While Musk’s promises may not always align perfectly with reality, the success of Autopilot and FSD proves that he remains at the forefront of a societal shift from human-powered vehicles to those piloted by AI.

TSLA’s stock has witnessed a continuous downturn, with a decline of nearly 15% year-to-date and more than 25% over the past year. However, the stock has surged around 16% over the past month as investors increasingly focus on the upcoming Robotaxi event.

While delivery data is crucial for an EV company, investors are looking beyond that. Ben Kallo, an analyst at Robert W. Baird, noted, “Compared to Q124 when investor attention was intensely focused on near-term delivery estimates being too high, we see a growing number of investors shifting their outlook to the Robotaxi event on August 8 and the opportunity related to FSD.”

Ben Kallo anticipates that investor attention will remain toward the long term until the Robotaxi launch, which could include details on low-cost, next-gen vehicles. Meanwhile, Wedbush Securities analyst Dan Ives doesn’t anticipate significant fireworks for the June quarter but believes the 8/8 Robotaxi debut will be a substantial catalyst for TSLA.

UBS, however, is more skeptical about the Robotaxi event being an immediate catalyst for TSLA’s stock price. Nonetheless, the firm acknowledges that the EV maker has made significant technical progress in its Robotaxi and Optimus plans. And it is more likely than most companies to capitalize on AI in the physical world, with long-term benefits for its financial model.

Potential Risks and Challenges

While the upcoming Robotaxi event holds promise, it also has inherent risks and challenges. Autonomous driving technology faces stringent regulatory scrutiny. Tesla must navigate complex legal landscapes to deploy its Robotaxi fleet, which could delay implementation and affect timelines.

TSLA must continue to invest heavily in research and development (R&D) to ensure the reliability and safety of its autonomous vehicles. Critics argue that Musk exaggerates the capabilities of the technology, often with fatal consequences. There have been hundreds of crashes involving Tesla vehicles using FSD and Autopilot, resulting in dozens of deaths. The EV giant currently faces several wrongful death lawsuits.

While the Robotaxi initiative has long-term potential, it requires substantial upfront investment. The financial burden of developing and deploying autonomous vehicles could impact Tesla’s short-term profitability.

Bottom Line

TSLA is scheduled to release its second-quarter deliveries report this week, with analysts expecting to show a decline for the second consecutive quarter amid weak demand due to a lack of affordable new models and stiff competition in China. The deliveries report will be released just a few weeks before the company’s second-quarter earnings release.

Street expects Tesla’s revenue for the second quarter (ended June 2024) to decrease 4.2% year-over-year to $23.88 billion. The consensus EPS estimate of $0.58 for the same period indicates a decline of 35.9% year-over-year.

Despite the expected drop in deliveries and weak quarterly earnings, several market experts suggest that investor focus is shifting to Tesla’s long-term projects, particularly the high-profile Robotaxi event set for August this year. As the EV maker navigates the challenges and opportunities ahead, the Robotaxi initiative is a pivotal development that could redefine its future trajectory.

While short-term concerns persist, including weak consumer demand, regulatory hurdles, and ongoing legal challenges, long-term investors increasingly focus on Tesla’s ambitious autonomous driving vision. The event is poised to showcase the company’s technological advancements and could serve as a catalyst for renewed investor confidence.

STLA vs. California - Assessing the Investment Landscape Amid Emissions Policy Disputes

Stellantis N.V. (STLA), one of the globe's leading automakers, was formed in 2021 from the merger between Fiat Chrysler Automobiles and the PSA Group. The company's portfolio includes illustrious brands like Ram, Chrysler, Dodge, Fiat, and Jeep, and it has a strong presence in North America and Europe.

STLA has disclosed plans for significant workforce downsizing at its Jeep manufacturing plants in Detroit and Toledo, Ohio. The company has attributed its dire decision to the stringent emissions regulations enforced by California.

STLA’s Detroit plant, known for manufacturing the Jeep Grand Cherokee, may witness a potential impact on around 2,455 employees and roughly 1,225 workers at the Toledo facility – which is responsible for producing the Jeep Wrangler and Gladiator models – are also expected to bear the brunt of the downsizing decision.

To respond to the sluggish sales performance of its Jeep brand, STLA has made strategic moves to adjust production levels accordingly. These include transitioning from an alternative work regimen to a customary two-shift operation at its Toledo location and eliminating one out of three shifts at the Detroit facility, which currently employs 4,600 individuals. The intended job reductions are projected to take effect as soon as February 5.

Let’s understand the issue in detail...

Since this summer, STLA has substantially curtailed its shipments of internal combustion engine (ICE) vehicles and EVs to dealers in the 14 states that adhere to the stringent rules set forth by the California Air Resources Board (CARB).

Consequently, consumers shopping in these jurisdictions are typically presented with a stock of plug-in hybrid SUVs. However, an order must be placed for those interested in buying an all-electric version or an ICE model.

Quite contrarily, dealers trading in states operating beyond CARB standards face a disproportionately different situation with scarce or no hybrids in stock, essentially providing an ICE-only product lineup. The underpinning rationale for STLA's strategic supply management is to meet CARB's emission standards in those 14 states, enabling manufacturers to sell a fixed percentage of zero-emission vehicles and plug-in hybrids.

But here’s the challenge for the Jeep producer. In 2020, STLA rivals Ford, Honda, Volkswagen, and BMW entered an exclusive agreement with California, delineating unique compliance criteria considering nationwide sales rather than solely focusing on CARB's jurisdictions. STLA argues that such a modification disrupts industry balance by unfairly tilting it in favor of the brands due to the more achievable nature of these revised targets.

After the initial agreement, Volvo and Geely acceded to the pact with California, leaving STLA in an unfavorable position as their request to participate was rejected. Seeking an explanation, STLA alleges that the rebuff resulted from Chrysler's public protestation against California's assertive act of promulgating autonomous rules in 2019. This drew attention, provoking similar challenges led by other automobile manufacturers such as General Motors (GM) and Toyota.

GM was prominently outspoken among those opposing California's regulatory authority, culminating in a stern confrontation. As a reaction, California declared it would cease purchasing vehicles from GM for its fleet requirements. The discord was resolved in January 2022 when GM consented to adhere to California's stringent emission standards.

Recent developments include STLA formally challenging the stand by submitting a petition to California's Office of Administrative Law, indicating accusations against the state for clandestine regulatory maneuvering involving selective automakers in direct violation of the California Administrative Procedure Act and claiming it amounts to a “double standard.”

The requested reevaluation of the framework agreement represents a bid to prompt the state’s Office of Administrative Law to invalidate the contract. While this outcome is improbable, it serves to reestablish an equal playing field with those car manufacturers who previously expressed a more favorable stance toward reinforcing emissions regulations.

Probable Impacts on STLA

STLA has actively opposed President Biden's endeavors to curtail carbon emissions and promote EVs. They allege that the stringent regulations risk imposing multi-billion-dollar penalties on their operations.

The automobile manufacturer has voiced support for lowering emissions, citing it as a challenge to California to address its "competitive disadvantages" and ensure fair product distribution across all states.

Earlier this year, STLA revealed plans to cease the supply of non-hybrid vehicles in states adhering to California's stringent emissions regulations in compliance with these rigorous environmental standards.

The discontinuation of gas-only vehicle shipments to 14 states, in the absence of specific customer orders, may lead to substantial repercussions for STLA. The automaker's sales and market share could decline significantly, while costs might escalate, eroding profit margins.

Moreover, the recently filed petition by STLA, charging CARB with executing an “underground regulatory scheme” against the company, casts a shadow of potential legal disputes. Fines, penalties or sanctions from CARB or other administrative bodies could emanate from the proceedings.

Furthermore, it is expected that STLA will revise its vehicle distribution strategy, adjusting it based on CARB emission compliance per state. This shift may result in restricted gas-only model availability for dealers in non-CARB states. Consequently, such constraints could initiate ripple effects on customer satisfaction, loyalty, and retention, potentially impacting dealer profitability and operational efficiency.

Diminishing SUV production, a recent move by STLA, might endanger the company's ability to meet customer demands. Ultimately, this could lead to a substantial impact on the company's revenue figures.

Other factors that should be considered…

Despite STLA's gradual progression toward EVs, the company's investment in this sector is substantial. The Jeep Wrangler 4xe and Chrysler Pacifica hybrids remain among California's top-selling EVs. However, business performance is volatile.

STLA announced a recall of over 32,000 vehicles last month due to potential fire hazards. Declining sales of Jeep ICE variants and soaring interest rates have compelled the company to adopt aggressive cost-reduction measures. This change may result in major disruptions for numerous employees' livelihoods.

It is not the first time the company attributed layoffs to the EV transition. About 1,350 employees at STLA's Illinois plant were laid off, citing the same rationale. This development comes at a compelling time as Detroit's "Big Three" – General Motors, Ford Motor Company, and STLA – are simultaneously exploring cost-cutting strategies.

This follows the recent agreement to significant wage enhancement in response to United Auto Workers' strikes this year. Consequently, many positions within the automotive industry face uncertainty, leading to widespread usage of the term "restructuring" in the current discourse.

STLA is indeed the proprietor of several well-known brands. However, the perceived quality of these brands falls short when matched against some competitors. Management will need to remain steadfast in addressing and circumventing this issue.

The auto giant has set its sights on putting 47 EVs on the road by the end of next year. Of course, such a target is easier said than done. To successfully execute this plan, STLA must continue to innovate with new model introductions and astutely invest without placing undue risk on profit margins or destabilizing the company's financial footing. The successful implementation of this intricate transition represents the primary risk and question concerning STLA stock.

The difficulty of this task becomes more pronounced when compared to peers such as Tesla, which has already established streamlined profitability through its vehicle production.

Determining wise investment strategies that properly steer STLA forward while confronting a market saturated with inexpensive Chinese vehicles is challenging. Moreover, predicting the outcome of this endeavor remains incredibly tough.

Valuation

At the current share price, STLA’s shares look tantalizingly cheap. Its forward P/E and Price/FCF multiples are 3.44 and 2.51, respectively, lower than the industry averages. Also, the company pays an attractive dividend yield of 6.53%.

Bottom Line

STLA is at a crucial juncture. The auto industry is immersed in an epochal shift toward electrification. Despite STLA's robust cash flows, it lags behind premier EV manufacturers in key areas of technology, sales, and future competitiveness. As a newcomer within the EV space, STLA recognizes the need to accelerate its progress, with monumental investments lined up over the forthcoming decade.

Investing in STLA is not without risks. The viability of the investment hinges on the company's ability to generate a meaningful amount of cash flow this decade. If it fails to do so, this could significantly hinder the funding earmarked for its transition to EVs.

The increasing global demand for EVs could place STLA in a precarious position and negatively affect its cash flow from operations. With an influx of automakers vying for market share, the fierce competition in the EV market could pose significant challenges to STLA. However, the potential rewards could be substantial if the company implements its strategies effectively.

STLA must successfully navigate numerous hurdles, including imminent economic turbulence, pricing pressure, rapidly evolving consumer preferences, attacks from emerging competitors, and, importantly, the strategic handling of disputes related to emission policies.

It is somewhat eyebrow-raising that layoffs transpire so swiftly following the confirmation of the latest "record" UAW agreement, a pact envisioned to establish the most robust job security in the face of transitioning to Battery Electric Vehicles (BEVs) and hybrids. Contrary to expectations, job numbers appear to be contracting rather than expanding, marking yet another occasion where grim reality dawns after the initial euphoria dissipates.

Considering the waning demand for their " premium SUVs, " one might question if STLA ever alluded to the fact that they'd be reducing shifts and trimming employee numbers at their twin Jeep plants, considering the waning demand for their "premium SUVs." This comes despite the Fifth-Generation Grand Cherokee only halfway through its minimum six-year cycle.

Moreover, it is curious that they place the onus on California's stringent CARB regulations – rules that have existed long before. It would be expected that STLA has crafted or is at least devising strategies to roll out more BEVs and hybrids to enhance compliance with CARB regulations.

Interestingly, recent layoff news and issues with the CARB have kept investor confidence strong. Indeed, STLA stock experienced a decrease of less than half a percent on Thursday last week, a minor setback that has since been regained. However, given the current circumstances, potential investors might consider waiting for a better entry point in the stock.

4 Stocks to Buy Instead of TSLA as Its Downtrend Continues

Tesla, Inc. (TSLA) aims to sell 20 million EVs a year by the end of this decade. However, the company faces steep competition from other manufacturers as they launch their battery electric vehicles (BEVs) and invest in ramping up their EV manufacturing capabilities.

To ward off competition and economic uncertainty, TSLA has cut the prices of its vehicles this year. Recently, the company cut the prices for Model 3, Model S, and Model X in the United States. In China, TSLA reduced Model S and X prices. The company has been focusing on boosting volume growth by lowering prices, but it is affecting its gross margins.

Due to price cuts, discounts, and tax credits, the company reported delivering a record-setting 466,140 vehicles during the second quarter. However, Wall Street analysts have cut TSLA’s third-quarter delivery estimates by 2%. They expect the EV maker to deliver 462,000 vehicles during the third quarter.

TSLA CEO Elon Musk had said during the second-quarter earnings call that although it was sticking to its target of producing 1.8 million vehicles, third-quarter production would take a hit due to essential factory upgrades that would take place during the quarter.

Some analysts have forecasted that delivery numbers will be less than 460,000 units. Deutsche Bank analyst Emmanuel Rosner lowered his delivery expectations to 440,000, down from his previous forecast of 455,000. Baird analyst Ben Kallo has projected that the third quarter deliveries would be 439,200 units.

Rosner said, “Tesla’s 3Q 2023 deliveries and production could miss Street expectations, but more important, we see meaningful downside risk to 2024 consensus due to limited volume growth next year.” The analyst has cut its target price on TSLA to $285 from $300.

Amid the confusion over the third-quarter deliveries and production figures, many analysts are worried that TSLA’s production next year will be lower than the previous estimates. Deutsche Bank believes the EV maker’s earnings could face headwinds in 2024. In an investor meeting, they said that TSLA suggested that it was not looking to ramp up production at its Austin and Berlin factories to 10,000 units per week next year.

The bank has forecasted that TSLA will produce 2.1 million units next year, down from the previous consensus estimate of 2.3 million units. They also reduced the price target of TSLA to $285 per share from $300.

Moreover, TSLA is currently trading at an expensive valuation. In terms of forward EV/EBITDA, TSLA’s 42.58x is 364% higher than the 9.18x industry average. Likewise, its 7.47x forward EV/Sales is 564.3% higher than the 1.12x industry average. Its 70.97x forward non-GAAP P/E is 410.1% higher than the 13.91x industry average.

Given the uncertainty surrounding TSLA’s near-term prospects, it could be wise to buy fundamentally strong auto stocks Ferrari N.V. (RACE), General Motors Company (GM), Li Auto Inc. (LI), and NIO Inc. (NIO).

Let’s discuss these stocks in detail.

Ferrari N.V. (RACE)

Headquartered in Maranello, Italy, RACE designs, designs, produces, and sells luxury sports cars worldwide. The company offers a range, special series, Icona, and supercars; limited edition supercars and one-off cars; and track cars. It also provides racing cars, spare parts and engines, and after-sales, repair, maintenance, and restoration services for cars.

RACE’s revenue grew at a CAGR of 18.2% over the past three years. Its EBITDA grew at a CAGR of 24.2% over the past three years. In addition, its EPS grew at a CAGR of 29.1% in the same time frame.

In terms of the trailing-12-month net income margin, RACE’s 19.46% is 342.8% higher than the 4.40% industry average. Likewise, its 30.86% trailing-12-month EBITDA margin is 180.3% higher than the industry average of 11.01%. Furthermore, the stock’s 6.73% trailing-12-month Capex/Sales is 109.4% higher than the industry average of 3.22%.

RACE’s net revenues for the second quarter ended June 30, 2023, increased 14.2% year-over-year to €1.47 billion ($1.55 billion). Its adjusted EBITDA rose 32.1% over the prior-year quarter to €589 million ($620.54 million). The company’s adjusted EBIT increased 35.3% year-over-year to €437 million ($460.40 million).

Its adjusted net profit rose 33.1% year-over-year to €334 million ($351.89 million). Also, its adjusted EPS came in at €1.83, representing an increase of 34.6% year-over-year.

Analysts expect RACE’s revenue for the quarter ending September 30, 2023, to increase 25.8% year-over-year to $1.55 billion. Its EPS for the fiscal period ending March 2024 is expected to increase 8.8% year-over-year to $1.94. It surpassed the consensus EPS estimates in each of the trailing four quarters.

General Motors Company (GM)

GM designs, builds, and sells trucks, crossovers, cars, and automobile parts; and provides software-enabled services and subscriptions worldwide. The company operates through GM North America, GM International, Cruise, and GM Financial segments.

On August 16, 2023, GM invested $60 million in a Series B financing round of AI and battery materials innovator Mitra Chem. The company’s AI-powered platform and advanced research and development facility in Mountain View, California, will help accelerate GM’s commercialization of affordable EV batteries.

Gil Golan, GM vice president, Technology Acceleration and Commercialization, said, “This is a strategic investment that will further help reinforce GM’s efforts in EV efforts in EV batteries, accelerate our work on affordable battery chemistries like LMFP, and support our efforts to build a U.S.-focused battery supply chain.

On April 25, 2023, GM and Samsung SDI announced that they plan to invest more than $3 billion to build a new battery cell manufacturing plant in the United States, slated to start operations in 2026.

GM Chair and CEO Mary Barra said, “GM’s supply chain strategy for EVs is focused on scalability, resiliency, sustainability, and cost-competitiveness. Our new relationship with Samsung SDI will help us achieve all these objectives. The cells we will build together will help us scale our EV capacity in North America well beyond 1 million units annually.”

GM’s revenue grew at a CAGR of 13.6% over the past three years. Its EBIT grew at a CAGR of 46.6% over the past three years. In addition, its net income grew at a CAGR of 82.4% in the same time frame.

In terms of the trailing-12-month levered FCF margin, GM’s 7.27% is 42.3% higher than the 5.11% industry average. Likewise, its 15% trailing-12-month Return on Common Equity is 34.2% higher than the industry average of 11.17%. Furthermore, the stock’s 5.95% trailing-12-month Capex/Sales is 84.9% higher than the industry average of 3.22%.

For the second quarter ended June 30, 2023, GM’s total revenues increased 25.1% year-over-year to $44.75 billion. Its net income attributable to stockholders rose 51.7% year-over-year to $2.57 billion. The company’s adjusted EBIT rose 38% year-over-year to $3.23 billion. Also, its adjusted EPS came in at $1.91, representing a 67.5% increase year-over-year.

For the quarter ending September 30, 2023, GM’s revenue is expected to increase 3.9% year-over-year to $43.52 billion. Its EPS for fiscal 2023 is expected to increase 1.5% year-over-year to $7.70. It surpassed the consensus EPS estimates in each of the trailing four quarters.

Li Auto Inc. (LI)

Headquartered in Beijing, the People’s Republic of China, LI designs, develops, manufactures, and sells new energy vehicles in the People’s Republic of China. The company provides Li ONE and Li L series smart electric vehicles. It also offers sales and after-sales management, technology development, corporate management services, as well as purchases of manufacturing equipment.

LI’s revenue grew at a CAGR of 263.4% over the past three years. Its total assets grew at a CAGR of 115.8% over the past three years.

In terms of the trailing-12-month levered FCF margin, LI’s 23.51% is 360.2% higher than the 5.11% industry average. Likewise, the stock’s 7.69% trailing-12-month Capex/Sales is 139.2% higher than the industry average of 3.22%.

LI’s total revenues for the second quarter ended June 30, 2023, increased 228.1% year-over-year to RMB28.65 billion ($3.91 billion). Its gross profit rose 232% over the prior-year quarter to RMB6.24 billion ($853.63 million). The company’s non-GAAP income from operations came in at RMB2.04 billion ($279.07 million), compared to a non-GAAP loss from operations of RMB520.80 million ($71.25 million).

Also, its non-GAAP net income stood at RMB2.73 billion ($373.46 million), compared to a non-GAAP net loss of RMB183.40 million ($25.09 million).

Street expects LI’s revenue for the quarter ending September 30, 2023, to increase 245.3% year-over-year to $4.64 billion. Its EPS for the quarter ending December 31, 2023, is expected to increase 151.7% year-over-year to $0.34. It surpassed the Street EPS estimates in three of the trailing four quarters.

NIO Inc. (NIO)

Based in Shanghai, China, NIO designs, develops, manufactures, and sells smart electric vehicles in China. It offers five- and six-seater electric SUVs and smart electric sedans. The company also offers power solutions, power chargers and destination chargers, power mobile, power map, and One Click for power valet service.

On July 12, 2023, NIO announced that it closed the $738.50 million strategic equity investment from CYVN Investments RSC Ltd, an affiliate of CYVN Holdings L.L.C., an investment vehicle majority owned by the Abu Dhabi Government with a focus on advanced and smart mobility. The NIO and CYVN entities would collaborate strategically in international business and technology cooperation.

NIO’s revenue grew at a CAGR of 70.6% over the past three years. Its total assets grew at a CAGR of 55.7% over the past three years.

In terms of the trailing-12-month Capex/Sales, NIO’s 17.62% is 447.9% higher than the 3.22% industry average.

For the second quarter ended June 30, 2023, NIO’s total revenues fell 14.8% year-over-year to RMB8.77 billion ($1.20 billion). Its adjusted loss from operations widened 132% year-over-year to RMB5.46 billion ($746.93 million). In addition, its adjusted net loss attributable to ordinary shareholders of NIO widened 140.2% year-over-year to RMB5.45 billion ($745.56 million).

Furthermore, its adjusted net loss per share attributable to ordinary shareholders widened 144.8% year-over-year to RMB3.28.

For the quarter ending September 30, 2023, NIO’s revenue is expected to increase 47.2% year-over-year to $2.66 billion.