A stock’s P/E is generally a function of three variables: 1/ Future expected growth rates; 2/ 10yrTYs; 3/ Stock’s beta. A fourth variable could be domicile or industry. P/E is a shorthand for net present value of the earnings or cash flow streams divided by the current or next year’s earnings. Unit and revenue growth tend to be more important to a P/E than profit growth since volume growth tends to be secular-based (megatrends, superior product, brand leverage, TAM expansion) than cost cuts which tend to be more one-time in nature. TSLA’s P/E on next year’s earnings has crept up to 84x ($269/$3.20 = 84x) which is higher than its recent historical P/E of 75x.

A TSLA P/E re-rating may be justified, depending on the trajectory of future growth. We have been making the case that TSLA 2025 Street EPS estimates look $.20-$.40 too low, so TSLA’s true forward FY’25 P/E is likely closer to 75x ($269/$3.60). As TSLA’s forward growth rate increases, or as long-term int rates fall, TSLA’s P/E mathematically rises. Conversely, as TSLA’s growth rate falls, or as long-term treasury yields rise, TSLA’s P/E should fall. TSLA remains a long duration stock, meaning most of its cash flow is in the tail, which gets impacted most by a change in int rates. 2/ There are two false $TSLA P/E narratives belting circulated - one by TSLA bears and one by TSLA bulls - that are wholly inconsistent with financial theory and need to be rebuked. The first erroneous P/E narrative is that TSLA’s P/E shouldn’t be 10-15x that of other car companies. This P/E reversion to the mean argument makes no sense because TSLA forward EPS growth estimates are 25-30% while GM, F, STLS, VOW forward growth rates are 0% at best. Should $NVDA ‘s P/E be higher than $INTC? Of course it should, because NVDA is expected to grow revs and earnings at well above Intel’s forward rev and earnings growth rates.

Awesome! Great for $TSLA SH and great for Twitter.

https://twitter.com/elonmusk/status/1656748197308674048

My $TSLA 6-12 mo PT remains $320, which I estimate by taking 2030 EPS of $24 and applying a 30x P/E (1.5x 2030-forward growth of ~20%) and discounting back by a 13.1% cost of equity (assumes 3.5% 10yrTY). My $TSLA 2030 EPS of $24 assumes 10.2M deliveries and a Auto GM % of 23.0%. 2030 WS consensus is now 6.3M delivs (+21% CGR) and $14 EPS (+26% CGR). The avg WS 6-12 mo $TSLA PT is $192, down from $240 at 2022 year-end.

I don’t think it’s fair that many $TSLA YouTubers are blaming TSLA’s falling stock price on “Wall Street’s short term focus.” Price discounts are the ultimate short term tool and produce a “sugar high” as volumes are pulled forward. WS does not support this short-term thinking. 2/ On the other hand, WS would overwhelmingly support TSLA’s efforts to accelerate EV adoption by advertising why EVs are better than ICE vehicles, or highlighting TSLA advantages vs other EVs. Unlike pricing, advertising is a long term investment with long term ROI.

In Europe, $TSLA M-3/Y inventories remain high despite the recent price cuts.
Source: tesladata.mattjung.net/tesla-europe-i… In the US, new M-3/Y price cuts have only been in place since Tues night (4/18), but to date M-3/Y inventories haven’t fallen much.
Source: tesladata.mattjung.net/new-model-y-da…

We expect $TSLA to trade between $150-$200 until some pricing clarity emerges and CT delivery event at end of 3Q. At $165, TSLA very cheap at 32x 2024 Adj EPS and +30% L/T volume growth. TSLA price cuts still likely in China with order backlog and delivery times lowest since Dec. 2/ $TSLA remains our 2nd largest position at a 5.7% weight after yesterday’s decline. We trimmed our position before 1Q Earnings @ $180 because we expected Adj EPS est to decline 7-8% after Tues’ price cuts and mgmt to provide weak guidance on GM% ex-RC on the CC (both happened).

In equities, bad news has become good news again. So far this year growth +8.3%, value +4.6%, and S&P +6.0%. Within growth, high P/E names are up the most. Driving this: Fed is signaling a pivot with inflation receding and leading econ indicators turning negative. Several leading economic indicators flashing negative, which should convince the Fed to pause further rate hikes in the coming months:

1/ Rents now falling, which should start to push down overall Shelter costs, which make up 40% of core CPI.

At $178, $TSLA +44% YTD vs NDX +11%, incl +70% (NDX +13%) since Jan 6 bottom.

TSLA 2023 Non-GAAP EPS now $4.34 (-19% YTD); current 2023 P/E of 41x vs 22x on 1/6/2023.

Street now looking for TSLA 2022-27 EPS growth of 20% CGR (PEG 2.0x, same as R1G). $TSLA +33% this week (NDX +5%) after soft 4Q EPS (Auto GM ex-RC 24.3% vs 26.3%E, 23% ex-FSD def rev recog)
- Jan orders 2x Jan production
- Elon’s view TSLA 2023 volume potentially 2.0M
- Reiterate 50% L/T vol growth
- Zach floor on 2023 Auto GM% of 20% and ASP of $47,000.

$TSLA 4Q conf call bullish (+6.8% pre-mkt):
- Reiterated goal of 50% L/T prod’n growth while resetting 2023 vol expectation at 1.8M
- Shared that Jan orders so far were 2x production
- Cytruck on track for late 2023 intro
- Set 2023 floors: GM% ex-RC will exceed 20%, ASP >$47K. 2/ While $TSLA 4Q Adj EPS ex-one-time FSD def rev recognition ($324M) and auto GM% of 24.3% were below expectations, investors interpreted 50% L/T vol guide and 2x comments about Jan orders as very positive. Elon’s comments that 2023 vols could potentially hit 2.0M also helped.

$TSLA cut prices on all M-3 and M-Y models by 6-13% in China and other Asian markets to battle soft demand. This will lead to another round of 2023-2026 earnings cuts. While needed to stop China EV share losses, China prices of M-3 and M-Y are now 40% below what they are in US. 2/ We believe TSLA’s bad Dec China sales (48K, lowest 3rd mo of a qtr in 6 qtrs) and BYD’s continued success prompted this aggressive move. We’ve also argued that the current imbalance between $TSLA capacity (90K/mo) and demand (sales+exports 80K/mo) was unsustainable.

Preliminary $TSLA China CPCA Dec sales (domestic + exports) of 55.3K were the lowest third month of a quarter in 5 qtrs, but have to be kept in the context of the massive Covid outbreak in Dec and TSLA’s efforts to smooth the quarter-end delivery wave. 2/ $BYDDY BEV only sales growth continues to accelerate while $TSLA has flattened (4Q TSLA domestic 128K). All of BYD’s growth comes in the under ¥200K segment (under $30K). We argue TSLA needs to prioritize a new TSLA compact ($25-$30K) to regain momentum in China. @elonmusk

We are reducing $TSLA 2023 EPS to $6.30 (from $7.20) and 2023 vols to 2.0M (50% YoY) to reflect a reduced global SAAR est (68M vs 75M) and a reduction in 2023 ASP to $52.1K (from $57.3K). We reduced our 2023 Auto GM% to 28.5% (from 29.0%). Our new L/T vol growth forecast is 35%. 2/ We are reducing our $TSLA PT to $400 (from $550), based on our 2030 earnings of $32 and assuming a 30x P/E (1.5x PEG). We are holding our discount rate at 13.6% which assumes a 4.0% 10yrTY. During this period of high uncertainty, we have adopted a more conservative posture.

@elonmusk joined a Twitter Spaces call today. Key takeaways:
1/ Elon won’t sell more $TSLA shares for 18-24 months
2/ Board open to share buyback but depends on severity of recession
3/ TSLA is executing near flawlessly
4/ Elon believes we will enter 2009-like recession in 2023 2/ Much of what shapes Elon’s thinking is his view the Fed will keep raising rates even as we head into recession. Elon doesn’t get Fed thinking - Fed will cut short term rates which will reduce long term rates as eco growth falters and inflation recedes to avoid deep recession.

Unless Elon u-turns in stepping down as TWTR CEO, it seems like all the bad news is in $TSLA stock:
- Elon can’t sell more TSLA until 4Q earnings end of Jan.
- 4Q consensus delivs of 430K seem achievable with China vols of 10K/wk.
- Selection of new TWTR CEO is now a catalyst. 2/ I’m surprised $TSLA BOD stood by while Elon spent the bulk of his time at TWTR and not TSLA post deal. I believe the BOD finally pressured Elon to give up his TWTR CEO role or risked being sued for not acting in the best interests of TSLA SHs - hence Sun night’s TWTR poll.

TWTR overhang could partially lift once Elon appoints a new CEO, although Elon still has to fund TWTR’s massive losses, which could worsen. $TSLA trading window is now closed to Elon until late-Jan. We believe TSLA brand risk from the TWTR chaos will ease once Elon steps down. IMO the $TSLA board put pressure on Elon to step down as TWTR CEO. It’s also possible existing or new TWTR equity investors insisted on a more seasoned social media CEO to invest new equity capital. The 7 weeks with Elon as TWTR CEO were clearly bad for SHs (TSLA -33%, NDX flat).

Only one other time did I think @elonmusk was putting $TSLA SH at risk. That was Feb 2021 when TSLA invested $1.5B in #btc @ $32K per btc. I exited TSLA at $290 (split-adj) then re-entered in May/Jun at <$200 when it became clear TSLA wouldn’t buy more BTC as institutions exited. 2/ Back then, like now, Elon was convinced he was right and for a while he was. #btc soared to $60K and Elon tweeted non-stop about #Btc and #Doge “going to the moon.” But then Elon stopped tweeting as #btc crashed back to $32K, then soared again, and finally crashed for good.

Many have asked why WS $TSLA PTs haven’t dropped much in 2022 even as TSLA stock has crashed. The short answer: That’s really not how it works. Unless fundamentals (volume, earnings forecasts) change, PTs shouldn’t change much unless int rates change materially. 2/ WS analysts set price targets by going out 3-5 years and forecasting net income in 3-5 years and an appropriate multiple 3-5 years out. They then discount that future value back at an appropriate cost of equity to reflect TSLA's riskiness.

I would expect $TSLA to recognize one-time Def Rev of ~$1B in 4Q when FSD V11 is released broadly in the US at year-end. Most analysts will back it out of EPS as one time. The ongoing FSD take rate could increase once EV buyers know they can use FSD immediately after purchase. 2/We know from the 9/30/2022 10-Q that $TSLA has a Total Def Rev balance of $2.8B and expects to recognize $1.1B of Def Rev over the next 12 mos. I assume the $1.1B est is the FSD Def Rev balance. We believe TSLA recognizes 50% of FSD Def Rev in Yr1 and the balance over ~6 years.

Since Elon reversed course and agreed to complete the takeover of $TWTR on 10/4, $TSLA -28% vs NDX +1%. Since the deal closed on 10/28, TSLA TSLA -19% vs NDX +2%. Clearly, the TWTR overhang persists. 2/ In the meantime, $TWTR lost significant adv rev after Elon laid off 50% of TWTR employees, threatened to “thermonuclear name and shame” advertisers who left the TWTR platform, and launched a new $8/month verification protocol that backfired badly and was tabled until 11/29.

I don’t see $TWTR going bankrupt, but there’s truth in @elonmusk comments that he sold $4B $TSLA shares to “save Twitter.” I estimate $TWTR currently has a -$3.4B/year hole to fill. 2/ Pre-Elon, TWTR Advertising revs were on track to do $4.4B for 2022. Subscription fees pre-Elon were $0.4B/year.

TWTR Costs and OpEx were running at $5.6B/year. Let’s assume Elon’s cost cuts bring that down to $4B/year.

Interest expense on $13B new debt is $1.2B/year.

$TSLA has underperformed NDX -40% vs -15% (1.375x beta-adj decline should be -21%) since Elon’s $TWTR offer was announced 4/14/2022. During that time, Elon has sold three tranches of $TSLA stock totaling $20B, and the buyout itself got off to a rough start as advertisers fled. 2/ Many still deny the existence of a TWTR overhang on $TSLA stock despite clear evidence to the contrary. Maybe the confusion is that Elon’s purchase of TWTR hasn’t yet impacted TSLA demand or earnings, but it has hurt $TSLA stock as Elon sold TSLA shares to “save” TWTR.