Tesla Weekly (9/6): Troubles in Europe

Tesla's August sales in Europe plunged by 44% YoY raising questions about whether Tesla really needs its $4.2 billion factory in Germany

Trading Thoughts—This is Not a Normal Auto Stock

Figure 1: Tesla Rises on Strong Volumes This Week

Source: Bloomberg

This week was a great example of the absurdities one has to deal with when shorting Tesla. The stock ramped up on high volumes due to heavy call buying and totally ignored the atrocious sales number released from Europe and Asia. My recommendation to the faint of heart is to stay away from this stock until Election Day, but thereafter take a fresh look. Main points are as follow:

• Tesla is up 7.5% this week on strong volume despite a 3.3% decline in the Nasdaq 100. This is the first week of outperforming the broader markets after underperforming in August.

• There was no specific catalysts this week and, in fact, Tesla rose despite Musk’s weekend meltdown over Brazil closing down Twitter and freezing Starlink’s local assets.

• Bad August Sales: The stock’s rise also came despite horrible August sales numbers in the EU and Asia yesterday. China wholesale shipments (domestic sales + exports) in August were +3% YoY, but this was likely led by a sharp one-off rise in exports to Canada ahead of their 100% tariff on China-made cars from October 1.

• Given how strong the options volumes were yesterday (see Figure 2, where call options volumes were 2x average levels), it definitely feels like someone is trying to push this stock up.

• FSD Pump Lifted Tesla on Thursday: Yesterday’s 4.9% rise on strong volume was particularly baffling given the roughly flat Nasdaq 100 (Tesla was up as much as 7.1% at one point). There was no specific news one could point to but many on FinTwit pointed to the Full Self-Driving (FSD) “Roadmap” tweeted by Tesla the night before (see Figure 3).

• China FSD is a Nothing Burger: There was excitement about FSD being released in Europe and China (pending regulatory approval) in Q1 2025. This is pure hype, in my view, as FSD will not be fully functional in China. Moreover, rivals’ driver-assist products are said to be much more advanced and roughly half the price of what Tesla charges in the US on a monthly basis ($99/month). Competition in China’s car market is so stiff that some speculate that carmakers there may start giving away their ADAS products for free.

• Europe FSD Insignificant Given Shrinking Car Sales: It’s hard to imagine the EU accepting FSD (just a hunch because they haven’t for so long up to now) and even if they did, I can’t see it selling more than it does in the US, where the take rate is so low that Tesla won’t even disclose the numbers. Even if the take rate were as high as it is in the US (under 10%, by my estimates) Tesla’s car sales in Europe have become so anemic that it would have little impact on earnings (see main section on the European market below).

• Musk Could be Looking to Sell More Tesla Shares: The possibility of Musk getting ready to sell more of his Tesla holdings to keep Twitter afloat is a distinct possibility, which would explain the aggressive call buying amid bad news. Twitter is likely bankrupt and more advertisers are set to leave from January 2025. The window for insider selling usually closes 2 weeks before quarter end and Twitter’s next interest payment of $325 million is due in late October.

• Election Risks to Consider if You’re Short Tesla: Trump confirmed that he’d choose Musk to head his “Government Efficiency” agency because “Musk is a good cutter”. If Musk joined the Trump Administration, he’d likely have to sell his 12.87% stake in Tesla, which is 411 million shares or 5.8 days of average daily trading volume. This gives him a clear incentive to get Tesla’s stock up as high as possible by Election Day on November 5th. So while the fundamentals are bleak (Q3 should be one of Tesla’s most unprofitable quarters since Q1 2021), I wouldn’t put it past Musk to pull whatever rabbits he can out of his hat for (1) a strong Q3 deliveries print on October 2nd, (2) a hype-filled Robotaxi Day on October 10th, and (3) stronger-than-expected Q3 earnings results on October 18th. While I’m highly confident that Tesla will generate losses and burn huge amounts of cash in 2025, the path to Election Day might be a roller-coaster ride. If Trump loses, Tesla’s stock should plummet and Musk may, at minimum, be banned from ever running a public company again.

• Being the degenerate that I am, I shorted more Tesla this week. I’m still not at a full position, but the RSI is starting to approach the “overbought” level (see the red line in Figure 1). However, given the above scenario of Musk trying to pump the stock up in case he has to sell before joining the Trump Administration, I may reduce my exposure. One could actually make a case for going long until Election Day, but I certainly wouldn’t.

Figure 2: Thursday’s Call Option Volumes Were 2x the Average

Source: Bloomberg

Figure 3: Tesla Issues Roadmap for FSD Roll-Out

Source: Twitter

Robotaxi Day Could Lead To a Brief Sell-Off

In light of the upcoming Robotaxi Day on October 10th, it’s worth looking at previous events and how Tesla traded before and after (see Figure 4 below). The average lead-up to the event from 5 days before saw -a 0.4% decline in the stock (+0.6% relative to the S&P 500’s performance), while the day after the event, Tesla’s stock usually sold off by 3.9% in absolute terms on average and -4.6% relative to the S&P 500. Five days later usually saw Tesla down by 7.3% in absolute terms and -7.6% in relative terms.

This week it was reported that Tesla has been mapping the Warner Brothers’ studio in Burbank, California, where they are said by Bloomberg to hold the Robotaxi event on October 10th. This will bring back bad memories from Musk’s SolarCity event in 2016, which was held on the set of “Desperate Housewives” (a popular US drama) using solar tiles that weren’t even functional.

I plan to short Tesla the day of the event. The fact that they have to use a movie studio itself is a red flag after having already delayed it from its original date of August 8th. And we all know that Tesla has no Level 4-6 autonomy capabilities.

Figure 4: Tesla’s Absolute & Relative Returns Post Events

Source: Bloomberg

Tesla’s Growing Problems in Europe

Despite having spent close to $5 billion building a factory in Brandenburg, Germany, which started production in March 2022, Tesla’s sales in Europe are beginning to drop towards levels before the factory existed (see Figure 5).

Tesla’s German factory operated at 18% of capacity between March to December 2022, 47% last year, and at 45% in the 1H of 2024. Capacity utilization under 70% usually implies losses. Below are what I see as growing problems for Tesla in Europe that could lead them to write off their German plant (if Musk were smart, and we know he isn’t).

Figure 5: Tesla’s Sagging Sales in Europe

Source: ACEA

• Europe is Too Competitive for Tesla: European carmakers have long traded at a discount to their US and, especially, Japanese counterparts (see valuations in Figure 6 below). Given the nationalism among consumers in the different European countries for their local brands and lower affordability, it’s always been a tough market for carmakers (both Ford and GM pulled out years ago, and Honda’s presence is shrinking into insignificance).

• EV Boom is Fading: Sales of BEVs through July were flat year-to-date (YTD), while hybrid electric vehicles (HEV) were up 22% YTD. Tesla sales through August are now down 17% YoY despite Q3 2022 having no Model 3 shipments from Shanghai due to its “refresh”. This is causing so much pain for the VW Group that, this week, they announced that they’d like to shut down two factories in Germany (their union and the Lower State of Saxony, which has huge voting rights, will need to sign off on this). Tesla’s market share in Europe has dropped from a peak of 3.14% in Q4 2022 to 2.3% in Q2 2024, despite their German factory having expanded annual capacity to around 400,000 last year from 250,000 in 2022.

• Tesla’s German Factory Was Not Needed: In my opinion, Musk chose Germany as the location to build a factory in Europe as a vanity project. Even German carmakers that build new factories choose Eastern Europe, where costs are lower and the parts supply chain is robust (BYD is building its first European factory in Hungary). Figure 7 shows how much Tesla made in “foreign” pre-tax profits”, which is from every car sold outside of the US. While its Fremont factory exports contribute a bit, Tesla’s Shanghai factory makes up the bulk of 2023’s $6.8 billion of pretax profits, most of which was from exports to Europe (domestic Chinese sales make close to 0% margins due to having the lowest prices in the world). Because of its German plant, Tesla has cut back on exports of the Model Y from Shanghai to Europe this year (they still ship the Model 3 from China). Even with the additional 9% tariff in the EU on Teslas imported from China, Tesla still could’ve exported from low-cost Shanghai to high-priced Europe (this becomes an even more profitable prospect if the Chinese yuan devalues, as it makes Tesla’s built in yuan costs much more profitable when sold in euros). Exports from Shanghai are down around 11% YTD, but should fall further in 2025, which puts Tesla’s most profitable factory in China at risk as there isn’t enough demand in other regions that can pick up the slack left from cutting Model Y exports to the EU (total exports to Europe in 2023 were 207,117, or 22% of Shanghai’s production).

• German Losses Are Significant: Figure 7 shows Foreign pre-tax profits from 2021 to 2023. Note that most of this is Shanghai’s shipments, while Germany likely lost a lot of money, which pushed Foreign profits down by 17% YoY to $6.8 billion in 2023 (Tesla’s Shanghai production was actually up by a whopping 54% YoY in 2023). I estimate that Germany made around $1.8 billion in losses last year on $7.4 billion of revenue, which was only 47% of capacity (Tesla likely chose to supply the EU with China-made Model Ys, which is more profitable, as 2023 was the last year that Tesla’s tax rate in China was at 15% before rising to 25% this year).

Figure 7: Nearly 70% of Tesla’s Global Profits From China

Source: Tesla’s 2023 10-K

• Further Discounts in Europe: EV subsidies in Italy were down by 80% YoY in August after EV subsidies ran out. Tesla announced a €6,000 incentive program in Germany (Europe’s largest car market, but a small one for Tesla, ironically) in June, yet July + August sales were down 55% YoY. In the UK, Tesla is offering 0% interest rate loans yet July + August sales were down 24% YoY. This week, Tesla announced a €4,000 incentive program in France (Europe’s 2nd to 3rd largest car market) after its July + August sales were down 47% YoY. Given the extra 9% import tariffs on the Model 3 imports from Shanghai in Europe as of July (Tesla’s German plant only makes the Model Y, which is also an absurd mistake by Musk) and the much higher-cost Model Ys made in Germany are likely making zero profits if not losses.

• Tesla Should Write Off its German Plant & Supply From China: In its latest Q2 filings, Tesla discloses the value of its “long-lived assets” in Germany at $4.2 billion. Assuming that adding “short-lived” assets and layoffs take the tally up to $5 billion, a write-off of the German plant would only dent Tesla’s Shareholders’ Equity by 7.5% (this is so low, that it’s ridiculous that Musk hasn’t shut it down yet). And this will lead to a ramp-up at Tesla’s most profitable factory in Shanghai and likely lead to higher profits (see 2022 Foreign pre-tax profits in Figure 7 before the German plant was included).

• Tesla Has Profit Exposures Like the Big-3 Valuations: The Big-3 European auto stocks, Mercedes-Benz Group (MBG), BMW, and the VW Group (VW), are down by 14% on average this year, while Tesla is only down by 7% (see Figure 8 for price action and Figure 9 for valuations and returns). The reason the German carmakers trade at such low valuations is because 1/3 of their profits are from China, the weakest car market in the world where capacity utilization is said to be 50% at best (VW is has closer to 50% exposure to China, due to parts and unassembled car shipments), while another 1/3 of exposure is to Europe. So, the German Big-3 are exposed to the two worst car markets in the world. VW is now at a 0.05x EV/Sales ratio versus 2.0x at MBG and BMW, while Tesla generates lower profit margins and trades at a 2025 EV/Sales multiple of 11.3x. EV/Sales metrics are used with carmakers that lose money and I expect Tesla to generate a $3.1 billion GAAP net loss in 2025 and a $7.1 billion loss in 2026. If Tesla were to trade at the average German Big-3 EV/Sales multiple of 0.16x (vs its current 11.3x), its fair value would be $26 based on my 2025 revenue estimate of $65.4 billion and net cash estimate of $4.6 billion (consensus is at 2025 revenue estimates of $116 billion and net cash of $22.6 billion).

Figure 8: Auto Stock Performance This Week

Source: Bloomberg

Figure 9: Global Carmakers’ Returns & Valuations (Ranked by 2025 Pre-tax Margins)

Source: HM estimates and Bloomberg

Figure 10: Tesla Returns & Valuations vs its Magnificent 7 Rivals (Ranked by 2025 PEG Ratio)

Source: Bloomberg consensus estimates and MH estimates

Note: None of the report above is investment advice.