I think we can now explain why Tesla TSLA CEO Elon Musk has been so loud about his robotics and AI developments over the autos – because growth of EV sales is slowing markedly.
Tesla’s stock price plunged more than 12% by mid-day trading following a Q4 earnings report that missed both sales and earnings expectations. EPS of $0.71 fell short of analysts’ estimates of $0.74, and Revenue of $25.17 billion missed the mark of $25.76 billion.
Tesla’s Growth Hiccup
While neither of those results are egregious misses, the sales results show just a 1% YoY increase. Additionally, management offered concerning guidance saying that volume growth “may be notably lower.”
Because Tesla’s premium valuation is based on the expectations of major secular growth in the EV market, seeing this slowdown could be a worrying development.
Furthermore, pressure on growth is only worsened by price cuts on cars, which further compresses margins.
Earnings Estimates and Valuation
In the chart below, which shows Tesla’s earnings revisions trend, we can see that once 2024 and 2025 estimates began to fall, the stock also started to struggle.
Tesla currently has a Zacks Rank #3 (Hold) rating, reflecting mixed earnings estimates.
Image Source: Zacks Investment Research
Adding to the downside risk is the premium valuation Tesla commands. But if the electric vehicle manufacturer can’t maintain the impressive growth rates of past years, it may not be able to boast such a high relative valuation.
TSLA is trading at a one year forward earnings multiple of 64.4x, which is below its three-year median of 89x, but way above its competitors.
Image Source: Zacks Investment Research
Automaker Alternatives
Toyota Motors TM and Honda Motor Co. HMC are two of the largest carmakers in the world, with long histories of success. Both Honda Motor Co and Toyota Motors have Zacks Rank #3 (Hold) ratings, indicating mixed earnings revisions, but have other promising catalysts.
Over the next 3-5 years Honda Motor Co. is projected to grow EPS by 21.2% annually, while Toyota Motors is expected to grow by 24.6% annually over the same period. Tesla on the other hand is currently forecasting 3–5-year EPS growth of 18.8% annually.
But the most important contrast between the auto companies is the valuations. In addition to better EPS growth forecasts, HMC and TM both have very appealing valuations.
Toyota Motors is trading at a one year forward earnings multiple of 10.3x, just above its 10-year median of 9.8x. However, that gives TM a PEG Ratio of 0.42x, a discounted valuation based on the metric.
Honda Motor Co. valuation is even more appealing on a relative basis. Now trading at a one year forward earnings multiple of 7.9x, it is below its 10-year median of 9.1 and has a PEG Ratio of just 0.37x.
Image Source: Zacks Investment Research
Bottom Line
Tesla stock likely has a promising long-term future, as Elon Musk has managed to continuously defy the odds, and release truly amazing products. However, because growth is such a critical driver of near-term returns in the stock and struggling, I don’t think the outlook is currently favorable.
I think for now, investors may want to consider avoiding Tesla stock and consider those trading at more appealing levels like Honda Motor Co. and Toyota Motors.