Leading up to its earnings report on April 23, Tesla (TSLA) shares had declined by nearly 42% in 2024 alone. Shares had fallen as far as 142, a 52-week low, and were trading at their lowest price-to-earnings ratio since last May.
The combination of declining revenues, tighter margins and rising competition (most notably in China) had shares trading at the steepest discount, relative to their book value, since 2019.
And so, when Tesla reported disappointing first-quarter earnings results, with both revenue and earnings well short of analyst estimates, shares subsequently traded as much as 12% higher the next day.
Even in the face of warnings about “notably lower” delivery volume in the coming quarters, TSLA shares rose more than 30% in the week that followed.
Why?
Based on the market’s response to the latest earnings, I’d argue that investors saw those figures and decided Tesla (TSLA) stock was oversold.
Normally, a steep earnings shortfall from a company that has now posted three consecutive underwhelming quarters would be easy fodder for short sellers. Instead, investors focused on the positive.
Notably, Elon Musk said the company plans to accelerate the launch of more affordable models to as early as later this year, in an effort to better compete with lower-cost producers like China’s hard-charging BYD (BYDDY).
After months of declines – TSLA shares had been sliced almost exactly in half from their July 2023 highs above 290 – the bad news of declining sales, earnings and deliveries was already baked into the share price. And, because Tesla was oversold, bargain hunters stepped in at the first sign of encouraging news.
For all the warts it’s shown of late – declining sales and earnings in the face of increased competition from lower-priced competitors; price cuts on some of its signature models eroding the company’s long-revered profit margins; Musk’s ever-increasing propensity for putting his foot in his mouth – Tesla remains the clear leader in electric vehicles. And while EV appetites have quelled, at least in the U.S., as more Americans are turning to hybrids as a compromise between their wallets and their environmental guilt, EV sales were still up 46% last year.
And despite a down quarter, Tesla still sold more electric vehicles in Q1 (386,810 of them) than any other EV maker in the world, BYD included (it sold 300,114). It’s still the Coca-Cola, McDonald’s or Nike of the EV-making world. More than any other company, Tesla is synonymous with electric vehicles. And historically speaking, the electric vehicle industry is still in its infancy – EVs accounted for just 7.6% of total U.S. sales last year, up from 5.9% in 2022.
While it’s not really a value stock, TSLA is the type of stock value investors love. “Wonderful companies at fair prices,” to paraphrase Warren Buffett. Every great company gets knocked on its keister from time to time, either due to a rough quarter or two or a, um, eccentric CEO acting out (check and check). And their share prices get sold off accordingly. But it doesn’t change the fact that they are great companies. All the bad news has done is make Tesla (TSLA) stock oversold, in other words, a great company trading at a far more attractive share price.
Those types of stocks are a value investor’s dream. I will endeavor to add as many of them as possible to the Cabot Value Investor portfolio.
