Cathie Wood Jumps to Buy Tesla Stock Amid the Crash

Tesla stock has been falling ever since it released its Q1 2023 earnings. It plunged over 4% yesterday after a Jefferies downgrade but Cathie Wood of ARK Invest invested $29 million into the shares yesterday.

While Tesla posted better-than-expected earnings in the quarter, its operating margins fell to 11.4% in the quarter – as compared to 19.2% in the corresponding quarter in 2022.

Tesla has lowered car prices multiple times this year which hurt its margins – even as they propelled Q1 deliveries to a record high.

The company said that “We’ve taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin.”

Jefferies downgraded Tesla stock

Jefferies analyst Philippe Houchois said in a client note that prioritizing volumes over profit margins “has its logic” but pointed to the resultant challenges.

He said, “However fascinating the investment case remains, relative price aggression is not supportive of a high multiple investment case while unfolding.”

The brokerage downgraded Tesla stock from a buy to hold and lowered its target price from $230 to $185.

TSLA has an aging product line

He added, “With multiple technical edges from software to batteries and manufacturing productivity, Tesla clearly over-performs on engineering but has fallen behind in building skills in marketing and product planning.”

Notably, Tesla hasn’t launched a mass model since the Model Y and even the Cybertruck is running way behind schedule – with mass production not expected until next year.

Tesla now has an aging product portfolio even as rivals are launching new models in a hurry. While Musk has said that the company is working on a new low-cost platform, we still don’t have many details.

Truist also downgraded Tesla stock

Last month, Truist also downgraded TSLA stock from a buy to hold and said, “This willingness to accept lower margins highlights the degree to which TSLA’s value is more tied to its AI initiatives; however, it also diminishes the value of the core automotive business.”

Notably, during the earnings call, Musk touted its autonomous driving as a profit driver. He said, “we’re the only ones making cars that, technically, we could sell for 0 profit for now and then yield actually tremendous economics in the future through autonomy. No one else can do that. I’m not sure how many people will appreciate the profundity of what I’ve just said, but it is extremely significant.”

Cathie Wood buys more TSLA shares

Cathie Wood meanwhile is not perturbed by the multiple downgrades that Tesla has faced this year and added more shares yesterday.

She recently upped her target price on Tesla to $2,000 and expects the stock to hit that level by 2026.

Musk has denied demand slowdown

Tesla has set a 2023 production guidance of 1.8 million which Musk said can rise to 2 million in the best case. He has tried to downplay the demand concerns and blamed slowing car sales on Fed’s rate hikes and macroeconomic turmoil.

He said, “every time the Fed raises the interest rates, that’s equivalent to increasing the price of a car. It makes the cars less affordable because people are able to buy cars as a function of what they can afford on a monthly basis.”

Musk has previously blamed the Fed for amplifying the slowdown in the US and said that the rate hikes would push the US economy into a recession.

He also blamed the deteriorating macros and said that it is hurting car sales. Musk said, “This is natural human reaction. So, if people are reading about layoffs and whatnot in the press, they’re like, well, they might be worried about — they might be laid off. So, then they’ll be, naturally, a little more hesitant than they would otherwise be to buy a new car.”

Tesla is targeting a production capacity of 20 million

Tesla has set itself a target of producing 20 million cars annually by 2030. To put that in perspective, Toyota, the world’s largest automaker, sold just over 10 million cars in 2022. Tesla expects to produce around 1.8 million cars in 2023 and said that it has the capacity to produce as many as 2 million cars.

To achieve the goal of 20 million deliveries, which amounts to a CAGR of over 41% between 2023 and 2030, Tesla might need to build many more Gigafactories. In the past, Musk said that the company would need over a dozen Gigafactories to reach that goal.

Tesla is setting up its next factory in Mexico

Currently, it has four plants of which two, Berlin and Austin, are in the process of ramping up production and has announced another Gigafactory in Mexico.

The competition in the EV industry is rising and last month Volkswagen unveiled the ID. 2all with a starting price of around $26,600 and a range of 279 miles. The company has stepped up its game and recently announced a nearly $200 billion investment, two-thirds of which would go towards tech and electric vehicles.

Volkswagen is the market leader in the European EV market and has set itself a target of capturing around 10% of the US market share by 2030 which is over twice its current market share.

In the US, Tesla now has around 5% market share of the total automotive market which is higher than Volkswagen.

As for EVs, Tesla is the biggest seller in North America by a fairly large margin.

TSLA bulls see it rising higher

Several other Tesla bulls also predict a massive upside in Tesla stock. Ron Baron for instance predicted that the stock can rise to $1,500 by 2030. Morgan Stanley also sees a massive upside in Tesla stock.

However, amid the margin compression, several analysts have turned apprehensive about the stock.

The company raised FSD (full self-driving) prices by $5,000 to $15,000 last year and Musk sees it rising way above even these levels.

Musk never shies away from such exorbitant claims. Recently, he slashed Twitter’s valuation by over half to $20 billion but predicted that the social media company’s valuation can rise 12-fold to $250 billion.

Tesla is the most valued automaker

That said, to his credit, under Musk’s watch Tesla has become the most valued automaker globally, and in 2021 its market cap surpassed $1.2 trillion.

It not only became the first automaker to have a market cap in excess of $1 trillion but at that time Tesla’s market cap was ahead of the combined market cap of all leading automakers.

Despite having fallen by almost half from the peak, Tesla’s current market cap is over thrice that of Toyota.

Buying the dip in Tesla has mostly worked for Wood as the stock rebounded subsequently. Would she be lucky this time around as well? We’ll have to wait and see.