Monday 6 February 2023

Tesla - A Definite Sell at $190 Price With Huge Downside

Given the recent uptrend and rebound optimism over Tesla, the value proposition of Tesla based on its fundamental of earnings has changed. At current prices of $190, the company is a definite sell with a large downside.

Recent Developments

Tesla Investors would be aware of the news that Tesla has slashed prices of its car models to gain market share. The question to many is what is the impact of margins to Tesla. Fortunately, I came across an article which shows the profit margins of EV makers.


With the implmented $5,000 price cut by Tesla, the profit margins made by each car will be halved. Even adding the cost savings derived from producing more cars, I doubt, it will be able to cover the current profit margin earned from making a car (US $9,574). Ford too is engaging in the price war

Tesla Recent Earnings

Tesla's earning per shares for 2022 is US$3.70 per share. With 2023 signalling a price war among the EV makers, but orders for Tesla vehicles will increase, I expect Tesla to maintain its US$3.70 per share earnings.

However, earnings will not grow as fast as they are in the future. At current prices of $190, Tesla is priced at 50 times PE. If Tesla is able to almost double its earnings every year, yes 50 P/E is reasonable; however, Tesla's profit is now fairly large and are engaging in a price war with EV makers. This will slash the margins they earn from their cars and put a downwards pressure on net earnings.

A 50 times P/E for Tesla is downright expensive. With conventional automakers priced at single digit to 10 times P/E, the best Tesla can be valued is only at 20 times price earnings.

Downside of 50%

With that, the target price of Tesla is in the $90s range, I expect Tesla share prices to fall 50% over this year as reality over its earnings capabilities set in.

<Author is neither short nor invested in Tesla at the time of publication>

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