Source: Barron Weekly

By Al Root Guo Liqun, a contributor to Barron Weekly

Tesla, Inc. (TSLA) is going through a difficult period, with problems including slowing demand, rising costs and the distracted Mr Musk.

However, it is time to buy Tesla, Inc. shares.

Yes, Tesla, Inc. is a mess now, and there are signs that the future will be very difficult. The waiting time for American buyers to buy the company's cars has been reduced from more than three months to no longer, with delivery growth slowing below the company's own targets, and at the same time, due to the increasing ratio of production to delivery in recent quarters, the company is taking price cuts, all of which are signs of falling demand. A series of actions by Musk after taking over Twitter have also raised questions about whether consumers will choose to buy other electric cars that are already on the market. Another disadvantage is that the US economy could fall into recession by the end of the year.

Compared with these factors, what deserves more attention from investors should be that Tesla, Inc. is the world's leading electric car manufacturer and is more than a decade ahead of other automakers. Tesla, Inc. is able to produce cars at much lower costs than its competitors, giving the company room to stimulate demand by cutting prices, which other companies cannot do. Of course, Tesla, Inc. 's stock is riskier to invest, but its share price has fallen 71% from its all-time high. It closed at $118.85 on Tuesday, and the 12-month forward price-to-earnings ratio is much lower than the 201 times it was two years ago. This is a good opportunity not to be missed.

On Friday, the news that Tesla, Inc. would cut prices in China highlighted the difficulties facing the company. Tesla, Inc. has been focused on increasing production and plans to produce 2 million cars in 2023, up from 1.4 million in 2022. This has raised concerns that after producing too many cars, they will have to sell all of them at reduced prices. Tesla, Inc. cut the price of Model 3 in China by 14% and the price of Model Model Y by 10%. These price cuts are also likely to be implemented in the US in the future, putting pressure on Tesla, Inc. 's profit margins, and Wall Street's earnings per share forecast for 2023 has fallen by 10 per cent since the end of September.

"Tesla, Inc. now faces two choices: lower the production growth target and keep the plant running below planned capacity, or maintain production and increase recent global price cuts, thereby putting pressure on profit margins," Bernstein analyst Tony Sacconaghi wrote in the research paper. Sacconaghi rated Tesla, Inc. 's stock as "outperforming the market".

Tesla, Inc. is still in the lead.

Tesla, Inc. is more profitable than its competitors, which will be the company's advantage in 2023.

Which choice Tesla, Inc. will make is obvious: the company will stimulate sales by cutting prices. Although this will have an impact on profit margins, Tesla, Inc. is able to withstand such shocks. The company's operating margin is expected to reach 18 per cent in 2023, far higher than the nearly 8 per cent of the rest of the industry. Even if profit margins fall by about 10 percentage points, Tesla, Inc. 's profitability will still be the same as that of BMW. (Germany) neck and neck. The company has sufficient profitability to weaken its competitors by cutting prices.

Joseph Spak, an analyst at Royal Bank of Canada Capital Markets (RBC Capital Markets), explained: "it can be said that if Tesla, Inc. cuts prices, the situation will be even worse for his competitors, because many competitors are still difficult to make a profit."

In addition, Tesla, Inc. is one of only two carmakers to profit from the electric car business, the other is BYD, 1211.HK, and everyone else is still losing money, including General Motors Co, whose Hummer sells for $110000 and plans to make a profit in the electric car business by 2025. Other companies, such as Toyota Motor Corp (TM), seem to get cold feet when they are eager to meet demand for electric vehicles that may not be met.

Most electric vehicle startups, including Rivian Automotive (RIVN) and Lucid Group (LCID), are far from profitable and do not have the scale to compete with Tesla, Inc.. These start-ups are in jeopardy at a time when investors want to see earnings growth, not just production growth.

This shows why Tesla, Inc., with a market capitalization of about $350 billion, is the most valuable car company in the world, even though its share price has fallen 69 per cent in the past 12 months.

It's not just a car company.

Of all the car companies, Tesla, Inc. is expected to generate the most free cash flow in 2023, rising from $9 billion in 2022 to about $12.2 billion. Toyota, the world's second-largest car company by market capitalization, is expected to generate about $10 billion in free cash flow this year and next. Pierre Ferragu, an analyst at New Street Research, believes that even the price cut will not have much impact on Tesla, Inc.. He expects Tesla, Inc. 's free cash flow to reach nearly $11 billion in 2023, assuming the car price is cut by 8% in 2022.

Tesla, Inc. will not stop here. The company plans to launch the long-delayed Cybertruck in 2023 and is likely to announce a long-awaited low-cost car on investors' Day.

In addition, Tesla, Inc. is more than just a car company, whether you agree with it or not. Although the company's "autopilot" software is far from achieving its claimed functionality, it is improving, with consumers willing to pay 15000 dollars for its top driving assistance software, a product and source of income that no other carmaker has.

Tesla, Inc. also has $12 billion in non-automotive businesses, mainly renewable energy power generation and battery storage technology, which are growing. Future Fund Active ETF co-founder Gary Black, who opened a megapack plant in Lethrop, Calif., in 2022, believes the project could generate an increase in operating profits of up to $3 billion a year.

Moreover, the electric car industry is not as bad as it seems. China's electric vehicle sales grew by about 90% in 2022, accounting for 25% to 30% of all new car sales. In the us, sales of battery-powered electric vehicles rose 70 per cent in the first three quarters of last year. George Janarikas, an analyst at dome canteen, expects the tax credit to help spur sales growth in 2023.

Using modified Twitter to save Tesla, Inc.

Of course, Tesla, Inc. still has many problems. Tesla, Inc. 's brand reputation has taken a hit since Mr Musk bought Twitter at the end of October, and according to a YouGov poll in December, more people now have a negative view of the Tesla, Inc. brand than a positive one. This also seems to have had an impact on Tesla, Inc. 's operations. According to a survey by Morgan Stanley (Morgan Stanley), 2/3 of respondents believe that some of Musk's actions on Twitter are undermining Tesla, Inc. 's fundamentals.

This is most evident in the fourth-quarter delivery volume released by Tesla, Inc. on January 2. The company delivered 40.5278 cars in the quarter, well below analysts' forecasts of about 420000. Tesla, Inc. 's share price fell 12% on Jan. 3, the worst start to the year on record. Although there are many disadvantages, Musk has the most to blame. "fair or not, he is now seen as negligent, which looks bad from a Wall Street point of view," said Dan Ives, an analyst at Wedbush.

Mr Musk also sold Tesla, Inc. 's shares in an unplanned way, a far cry from the 10b5-1 trading plan used by most companies' CEO. Mr Musk could sell Tesla, Inc. 's shares, but even long-term shareholders lost patience with the way he sold. Leo Koguan, chairman of SHI International and Tesla, Inc. 's third-largest individual shareholder, said: "I don't understand why the board allowed Musk to let Tesla, Inc. 's share price plummet. Why not sell it in bulk?" Tesla, Inc. 's board didn't respond to a request for comment.

To make matters worse, it has become the consensus of many economists that the US economy fell into recession in 2023, which usually means that new car sales will fall by about 1/3, which are already 20 per cent lower than they were before the epidemic because of persistent parts shortages. However, the economic slowdown will also give Tesla, Inc. time to develop a much-needed low-cost model, especially if other carmakers decide to reduce their investment in electric vehicles. "the recession may be a drag on Tesla, Inc. in 2023, but the company is in the best position to ride out the hard times, and some recent concerns have been overdone," Ferragu wrote in the research paper. "

In addition, Tesla, Inc. 's share price is cheaper than ever, trading at just 21 times 12-month forward earnings, lower than PepsiCo Inc (PEP), Visa Inc (V) and Walmart Inc (WMT). Judging from other indicators, the current valuation of Tesla, Inc. is also relatively reasonable. Bernstein's Sacconaghi is bearish on Tesla, Inc., who values Tesla, Inc. at $120 a share based on discounted cash flow estimates. Spark of Royal Bank of Canada Capital Markets values Tesla, Inc. at $186 a share, 65 per cent higher than Friday's closing price. New Street Research's Feragu has a "buy" rating on Tesla, Inc. 's shares, with a target price of $320, 183 per cent higher than recent levels. "if it goes according to our expectations in 2023, we think there is still nearly three times as much room for the stock to rise," Feragu said. "

There is nothing like Musk to get rid of Twitter to help Tesla, Inc. 's share price find the bottom, and the process seems to have begun. Twitter is trying to win over advertisers who have abandoned the platform, and the company plans to have its representatives meet customers and advertisers at this year's Consumer Electronics Show (CES). Now, Twitter needs to find someone who can manage the company's day-to-day affairs and let Musk focus on other things.

"Musk needs to hire a new CEO for Twitter to eliminate the impact of Twitter on Tesla, Inc. 's share price so that investors can see that he is 100 per cent focused on Tesla, Inc., including all the opportunities and risks of the company and its path to a $3,000bn valuation," said Mr Black of Future Fund.

Such a valuation level seems a little too high to achieve, but Tesla, Inc. 's valuation can be a good investment without it. Tesla, Inc. is a volatile stock and may even continue to fall in the short term, but looking forward to the next year or two, the share price is unlikely to be lower or even close to $100.

Let's do it while it's cheap.

Edit / Viola