Resist the urge to buy Tesla, this investor says

Stan Wong of Scotia Wealth Management has three words for investors thinking of buying Tesla (Tesla Stock Quote, Charts, News, Analysts, Financials NASDAQ:TSLA) after the stock’s recent surge: forget about it. Tesla may be a trailblazer in the electric vehicle space but Wong thinks there’s too much in the way of viable competition to warrant the stock’s sky-high multiple.

“This has not been a name that I’ve held in portfolios. It’s really had a lot of ups and downs and I think what concerns me the most about Tesla is the high expectations for growth — and what if that growth doesn’t come,” said Wong, director of wealth management at Scotia, who spoke on BNN Bloomberg on Thursday.

“You’re paying up for Tesla at 113x forward P/E, and, yes, their growth rate is around 40 per cent at this stage but still as a PEG ratio that’s pretty high and I would be careful of owning that particular stock,” he said.

Tesla is ending the week on a high, breaking through the $900 barrier for the first time as the market continues to reward the company for a solid earnings report on Wednesday. The company’s third quarter 2021 featured beats on both the top and bottom lines, coming in with revenue up 57 per cent year-over-year to $13.76 billion compared to analysts’ consensus call for $13.63 billion. EPS was $1.86 per share, up a huge 145 per cent from a year ago and above the Street’s forecast for $1.59 per share.

“The third quarter of 2021 was a record quarter in many respects. We achieved our best-ever net income, operating profit and gross profit. Additionally, we reached an operating margin of 14.6 per cent, exceeding our medium-term guidance of ‘operating margin in low-teens,’” said the company in a press release.

“EV demand continues to go through a structural shift. We believe the more vehicles we have on the road, the more Tesla owners are able to spread the word about the benefits of EVs,” the company said.

The company said it’s been dealing with supply chain challenges affecting the automotive space such as the global semiconductor shortage, congestion at ports and rolling blackouts but that the longer term picture is positive for sustained growth.

“Our goal is to get to millions of cars per year over the next couple of years and then ultimately, in the long term, be able to achieve 20 million cars per year. We’re going to grow as quickly as is feasibly possible with an eye toward a 50 per cent annual growth rate,” said CFO Zachary Kirkhorn in the company’s Q3 conference call.

Tesla’s share price had been a little under water at the halfway point of 2021 but the stock has taken off during the last couple of months and now sits up about 30 per cent for the year.

But Wong thinks investors looking to play the electric vehicle industry have been options that Tesla, specifically in lithium mining.

“If I wanted to be in that EV space I think I’d rather buy some of the lithium miners or participate in a lithium and battery EV ETF,” Wong said. “One that comes to mind would be the LIT in the US, which is a Global X lithium and ion battery ETF and has a basket of different miners, different battery and different inputs. It does include some Tesla but not anywhere in the top ten [holdings].”

“I’d rather hold some of those names than Tesla itself. You have to remember that we’re seeing a lot of competition [in electric vehicles]. There is not the one major car manufacturer that is not looking to get into this space, if they’re not already in the space in a meaningful way,” he said.

In terms of vehicle production, Tesla’s third quarter saw a 64 per cent year-over-year increase to 237,823 vehicles made over the quarter, while it delivered 241,391 vehicles, up 73 per cent from a year earlier.

By comparison, Volkswagen recently announced its third quarter deliveries of 122,100, which represented a 109 per cent year-over-year increase. At the same time, the company’s EV deliveries still represented only six per cent of its total vehicles delivered, leaving a tonne of room for EV growth within the company. Other automakers such as Chevrolet, Ford and Nissan are in similar positions having even lower percentages of their current sales in the EV space. 

“Our global electric offensive continues to run at full speed: we are clearly the number 1 for all-electric vehicles in Europe, and the number 2 in the USA,” said Volkswagen Head of Group Sales Christian Dahlheim in an October 15 press release. “In China, we really took off in the third quarter, with deliveries of BEVs almost 60 percent higher than in the entire first half of the year. The strong demand for our global target for the year of one million electrified vehicles (BEVs+PHEVs) is definitely there.”