Musk Says Tesla Could Be the World’s Most Valuable Stock. Now It’s Just a Car Company [BARRON’S]

There’s nothing wrong with Toyota. It’s a world-class manufacturer consistently churning out attractive products for solid profit margins. However, the problem for Tesla investors is valuation. Toyota stock trades for just 10 times estimated 2025 earnings, while Tesla stock trades for 43 times. The reason for the gap is that Tesla grows faster. But as Tesla’s growth rate decelerates, and its profit margins shrink, the valuation gap could narrow.

Musk, for his part, has said that Tesla is in between “two major growth waves.” The first wave began with the expansion of the Model 3 and Y platform. The second, Tesla hopes, will be driven by a lower-priced Tesla model.

Tesla’s 2024 operating profit margins are expected to be less than 9%, about 3 percentage points behind Toyota’s. In 2022, Tesla’s operating profit margin hit almost 17%. Toyota’s came in at about 8%.

“Why do you pay 43 times for something that’s not growing?” says Gary Black, co-founder of the Future Fund Active exchange-traded fund, and a Tesla shareholder.

Tesla’s earnings per share are expected to drop to $2.80 in 2024, according to a FactSet survey, from $3.12 a share in 2023. Growth is expected to return in 2025, with earnings per share hitting $3.88.

Wall Street’s 2025 Tesla estimate has come down about 45% over the past year. More downward revisions are coming with falling delivery estimates. On Wednesday, J.P. Morgan analyst Ryan Brinkman cut his 2025 earnings estimate to $3.35 a share from $4.25 after Tesla’s “record” first-quarter delivery miss.

Tesla said Tuesday that it delivered about 387,000 units in the first quarter—down from 423,000 a year ago and below the most bearish Wall Street numbers by some 20,000 units.

The weak results are having an impact. Analysts expect average annual sales and earnings growth of roughly 15% a year from 2023 to 2026. A few months ago, the expected rate was 25%.

For growth investors, declines in the rate of growth are almost as important as the absolute level of valuation, adds Black.

That doesn’t mean Tesla will trade like a value stock. Sales are still projected to double over the coming five years. Over that span, Toyota and Ford Motor ‘s sales are expected to rise 20% and 10%, respectively.

What this all does mean, however, is that investors should brace for valuation pressure, which can only add to the stock’s recent woes.

Coming into Wednesday trading, Tesla stock was off about 33% year to date. That mirrors declines in earnings estimates. Said another way, Tesla stock started the year trading for about 60 times estimated 2024 earnings, and it’s still trading close to that multiple.

What the multiple should be is tough to say. The stock’s valuation is partly wrapped up in the narrative: The Tesla mythology is that it’s more than a car company. It’s a software, robotics, energy, and artificial intelligence company that also happens to make cars.

One bad quarter or year doesn’t change a narrative completely, but it adds to investors’ uncertainty, and investors hate uncertainty.

Tesla stock was up 0.4% in midday trading, rebounding after falling almost 5% after the company’s disappointing delivery results. The S&P 500 and Nasdaq Composite were up 0.2% and 0.3%, respectively.

Write to Al Root at allen.root@dowjones.com