Why Wall Street Is Also Kinda Meh On Tesla Right Now

Earlier this week, Ford decided to be more like Tesla by dropping prices and Wall Street responded by handing the company a big L. I suppose we shouldn’t be surprised then that Wall Street seems to be shrugging off Tesla’s second quarter earnings which, actually, were pretty good.

While we’re at it, let’s talk about the market’s surprising new darling, GM’s persistent supply issues, and a little preview of what’s to come with the UAW-Big Three showdown. We’re calling it our Morning Dump.

Tesla’s Second Quarter Performance Not Good Enough For Wall Street

It’s safe to say that most, if not all, automotive executives would trade their quarterly performance for Tesla’s. While not as large as a Volkswagen or a Toyota, the Austin-based EV automaker is profitable, has a huge market cap, and makes great margins.

And the second quarter, mostly, was good news. You can look at the company’s investor relations deck right here. The company beat most expectations.

From Investor’s Business Daily:

Tesla reported Q2 profits growing 20% to 91 cents per share while revenue increased 47% to $24.93 billion. Analysts expected profits to edge up around 4% to 80 cents per share with revenue totaling $24.22 billion, up 43% compared with last year.

So why did the company’s share price drop this morning? Similar to Ford, investors seem worried that Tesla’s margins (i.e., the amount the company makes in profit compared to what it spends) are dropping too much and maybe there’s some softness in the EV market. The company’s gross margins are now at 18.1%, down from the magic 20% number that some investors look as the floor. Those margins are further down from 18.3% in Q1.

Obviously, Tesla may be more efficient in its production, but it can’t keep cutting prices forever and expect to make bigger profits. And Musk doesn’t seem to be stopping. From Reuters:

“I think it makes it does make sense to sacrifice margins in favor of making more vehicles,” adding that if macroeconomic conditions were not stable, Tesla would have to lower prices.

And.

“One day it seems like the world economy is falling apart, next day it’s fine. I don’t know what the hell is going on,” Musk told analysts on a conference call. “We’re in, I would call it, turbulent times.”

Hey, Musk and I agree! On both points. Tesla should keep building more cars. It has an enormous price, brand, first-mover advantage and it won’t last forever, but it’s sure lasting now. Second, I also don’t completely know what the hell is going on (I tend to agree with Team Transitory and see us in a position very similar to post WWII, where the world is reshuffling itself but inflation won’t last and America is in a great position to grow wages while keeping unemployment low).

I didn’t listen to the earnings call, but Tesla watcher/stan Sawyer Merritt had this interesting tidbit from Musk:

Elon Musk on auto gross margin: The short term variance in GM and profitability are minor relative to longer term picture. Autonomy will make all of these numbers look silly. I recommend looking at ARK Invest, their analysis is good.

— Sawyer Merritt (@SawyerMerritt) July 19, 2023

This is where we don’t agree. I don’t think autonomy will make all of the numbers look silly. Sorry. I might be wrong. I might be a FUD. I might be missing out on the investment of a century. I hear the jury’s still out on science.

I also think this is where Wall Street, as fickle as it is, might have it right. Tesla is an extremely valuable car company. Its stock price, in many ways, is justified. But until something else breaks, it’s still a car company, and in lieu of a huge autonomy or other product breakthrough, it eventually will have to be judged by car company standards.

But Investors Like Carvana

I wanted to subhed this as “but Wall Street likes Carvana” but that’s not entirely fair. This is going to be another one of those “the future is stupid” moments. Carvana, the online used car retailer with the big vending machines, clearly expanded too fast and cut too many corners to get explosive growth in a market gone crazy from inventory shortages. Its business also involved securitizing subprime car loans, a practice with some obvious shortcomings.

Things started to look real bad for the company last year. Now the stock is way, way up. What’s going on?

Carvana has become the latest ‘meme stock‘ like GameStop or AMC. It’s not one-size-fits-all, but a big pattern with these types of companies is that their stock prices reach historical lows for pretty reasonable structural reasons and then people with reddit accounts sweep in and buy a ton of shares, driving the price up.

I’m not going to get into all the minutia, but one reason why this works really well as a strategy is that other investors (often hedge funds) have ‘shorted’ these stocks. Shorting a stock is making a bet on that price going lower than it is at a point in time. At some point, those shorts have to be covered and the shorts get ‘squeezed.’ That seems to be happening with Carvana to some degree.

The company, to its credit, has engaged in cost cutting and debt restructuring, leading to improved financial results. That’s been bad news for the shorts.

Here’s a look at the scoreboard from Yahoo! Finance:

“The CVNA short squeeze is going to tighten even more with [Wednesday’s] upward price action,” Ihor Dusaniwsky, managing partner at S3 Partners, told Yahoo Finance on Wednesday morning.

“Expect more short covering today and over the next few days as short sellers look for exit points to trim their exposure in a very unprofitable trade.”

Short sellers lost approximately $646 million in Wednesday’s rally. Their mark-to-market losses since the start of 2023 are approximately $2.18 billion, according to S3’s data.

Yikes. Upgraded to: Don’t Buy Bluth.

BrightDrop Production Pausing Due To Delays

There’s a big question mark regarding how many Ultium vehicles that General Motors can actually produce in the short term to make up for the ending of production of the Bolt and Bolt EUV. I remain skeptical given the company’s recent deliveries.

That’s why this little tiny note from The Detroit News has me intrigued:

Production of BrightDrop electric vans will resume July 31 after two weeks of downtime due to parts availability. The plant had a planned shutdown the first and second weeks of July.

The BrightDrop vans are cool. I think it’s a good business. The GM-owned company seems to have plenty of orders. This could be a one-off, of course, but also maybe not? These are things to consider if you’re a buy, or maybe just buy curious.

Shawn Fain Meets With Biden Ahead Of Big Three Fight

We’ve already covered how new UAW President Shawn Fain is set to brawl with the Detroit Big Three (er… Big 2.5?) ahead of extremely pivotal negotiations. Well, now he got to meet with President Biden, and the details of how that meeting happened are important.

Here’s a report from The Hill:

The UAW leadership had asked for an opportunity to brief White House senior staff on their analysis and positions related to the negotiations with the top U.S. automakers, known as the Big Three.

When Biden learned about that meeting in the West Wing, he asked to also talk directly with Fain and the two of them had a short meeting, a White House official said.

It’s worth noting, as The Hill does, that the UAW has not yet agreed to endorse President Biden as they wait to see how he resolves their biggest future issue: EVs require less labor to make. It’s also worth noting that the UAW explicitly said it wasn’t going to endorse former President Trump and, frankly, it’s questionable how much the average UAW member casts their vote solely on that endorsement. Still, the UAW normally does endorse in these races.

My bias is pro-labor, I’m a WGAE member, so let’s here from someone else. This is John McElroy representing the industry perspective in a piece on Wards Auto:

I don’t have a problem with the union wanting to get more money for its people. I’m all for UAW workers getting good raises this fall. I’m all for reducing the time it takes for new temporary hires to transition to full-time status and get top wages. I’m even in favor of them getting more profit sharing, and I think they should be protected from inflation. Yet that should be achieved through creative but hard-nosed collective bargaining, not with attacks on the automakers in ways that can hurt them in the marketplace.

Look, I get what the union is doing. You get elected to union leadership, not appointed. Fain and his slate are politicians, just like any Democrat or Republican running for office. They need to convince their members that they elected the right leaders. And their members may not be so sure about that. Remember, Fain won the presidency by the slimmest of margins, only 0.4%. Worse, 86% of UAW membership did not even bother to vote in the election, based on the returns that the union publicly posted. So, Fain really doesn’t have a mandate, and that’s one reason why I think he’s staking out such a belligerent strategy to rally his membership.

I sorta disagree on both of his main points. First, Fain’s reform ticket overcame an extremely entrenched leadership that had been there for years, which I think does give him a very specific mandate to not roll over to the companies and be buddy-buddy with them. Second, I don’t think you should cut off your nose to spite for your face, but what other lever does the UAW really have to pull?

Either way, McElroy and I both agree that a strike is probably coming. We’ll see if Shawn Fain has made a huge mistake.

The Big Question

Let’s say, in a purely fictional and hypothetical way, that I’m giving you $10,000 to invest, but it has to be invested today and you have to do one of the following:

• A: Buy Tesla stock.
• B: Short Tesla stock (we’ll assume you have another $5k to cover your short position)
• C: Buy Carvana stock.
• D: Short Carvana stock (same assumption as above).
• E: I don’t understand the question and I won’t respond to it.

Also tell me why.

All photos: Imagine Television or Tesla