Tesla is a pass, even at these levels, says Scotia manager

The road has been bumpy over the past half-year for electric vehicle maker Tesla (Tesla Stock Quote, Charts, News, Analysts, Financials NASDAQ:TSLA) and while investors may be thinking that the drop in the stock makes for a good entry point, Scotia Wealth advisor Stan Wong is having nothing of it, saying just like the market’s general feeling about growth stocks at the moment, he’s not interested.

“Tesla has not been a name in our portfolio. We’ve actually never own Tesla. It certainly has had lots of ups and downs, but it is down about 44 per cent from its highs several months ago,” said Wong, portfolio manager at Scotia Wealth Management, who spoke on a BNN Bloomberg segment on Thursday. 

It’s been a while since the news flow from Tesla’s mercurial CEO Elon Musk outpaced that from the company itself but such seems to be the case lately, with headlines this week reporting that Musk and his brother Kimbal Musk were under investigation by the US Securities and Exchange Commission who are looking into allegations of insider trading connected to the sale last year of $108 million of shares in Tesla by Kimbal, a Tesla board member, with the sale occurring a day before Elon sent his now-famous tweet asking fans to weigh in on whether or not he should sell ten per cent of his stake in Tesla. Shares of the stock fell immediately after the tweet.

That development comes after Elon Musk ruffled feathers here north of the border when he heaped praise on the trucker convoy which disrupted Canada’s capital city of Ottawa for over three weeks. Musk took a stab at undergrad logic by arguing the Canadian government is the fringe minority, not the truckers, by tweeting, “If the government had the mandate of the people, there would be a significant counter-protest. There is not, therefore they do not.”

Tesla’s share price has been on the skids over the past few months, but the blame is likely more rightly placed on an overall market rotation away from growth stocks rather than on the CEO’s antics, as Tesla’s fall mirrors that of similar high-growth, high-valuation names, with even the big tech stocks feeling the heat. Amazon, for instance, is down about 16 per cent since mid-November and Microsoft is down 13 per cent over that time span. For its part, Tesla shares are off by about a third since early November.

Operationally, Tesla seems to be flying high, with revenues and profits showing strong growth. Tesla’s latest quarterly results came last month where the company’s fourth quarter beat analysts’ estimates for top and bottom numbers, showing revenue up 65 per cent year-over-year to $17.72 billion and earnings up 218 per cent to $2.52 per share. The consensus calls were for revenue of $16.57 billion and earnings of $2.36 per share.

The company said supply chain issues were hampering production but that operations were continuing to scale up, with new factories in Austin, Texas, and Berlin expanding production. For the 2021 year, Tesla’s revenue grew by 71 per cent compared to 2020 and EPS shot up 203 per cent to $6.78 per share.

“2021 was a breakthrough year for Tesla. There should no longer be doubt about the viability and profitability of electric vehicles. With our deliveries up 87 per cent in 2021, we achieved the highest quarterly operating margin among all volume OEMs, based on the latest available data, demonstrating that EVs can be more profitable than combustion engine vehicles,” the company said in its fourth quarter shareholder deck.

Competition in the auto sector has always been tough but Tesla has had a definite head start in the electric vehicle market, with the question now on everyone’s mind whether and when the other car-makers can catch up. Companies like Volkswagen and Toyota are now putting billions into EVs with an end goal of becoming net zero carbon emitters as the world continues to turn away from fossil fuels. General Motors, for instance, is aiming to have 30 EV models in production by 2025, with perhaps the star being its all-electric F-150 Lightning pickup currently being built.

Wong says along with the waning competitive edge, Tesla has the knock that it’s still a pricey stock, even with the recent pullback.

“It’s still actually trading at a fairly rich valuation at 70x forward P/E,” Wong said. “Yes, the growth rate looks very attractive but there’s lots of competition around the corner, whether it’s Volkswagen or Mercedes or Toyota or whatnot, and then the price to sales metric is at 9.5x.”

“So, it’s tough for me to look at this name — especially in an environment whereby money is moving back into value names — and to own a name like Tesla which is fairly expensive,” Wong said.