Updates on Avis Budget and Tesla

1) Last Friday, I wrote about the "epic short squeeze" occurring with the shares of car rental company Avis Budget (CAR). The stock had soared 358% over the past month on no news.

So I analyzed the company's terrible financials and absurd valuation – at the then-price of $448.98, it was trading 124 times this year's earnings estimates. And I concluded:

I would guess that we're very close to the top and that Avis' stock will soon be back to around $100 per share.

But I wouldn't short this stock – or go long it – at these levels...

It's too dangerous in either direction because the shares could go to $100 (or $1,000) in a matter of days.

Sure enough, the short squeeze continued earlier this week. The stock hit an intraday high of $765.94 on Tuesday before closing at $713.97.

But since then, it has crashed even faster than it soared... falling 37.8% on Wednesday and another 48.4% yesterday to close at $229.14.

Mark my words, it will soon be back to where it started around $100.

I was glad to hear one of my readers, Chris, profited from my e-mail last week. He wrote:

I got to say, I do appreciate the effort you and your team put into your daily letters and some of the good and bad you cover. I don't watch much TV, and had I not read your write up on Avis, I probably wouldn't have come across it. After reading, I bought puts on Friday and made 4x selling today. So, thank you!

2) Tesla (TSLA) reported earnings after the close on Wednesday and fell 3.6% yesterday.

The company's earnings presentation had all sorts of commentary about "sexy" things like batteries, energy, robotics, robotaxis, full self-driving ("FSD"), and, most importantly, all things AI: software, "training compute," and "inference compute."

But the reason I put Tesla on my list of "Stinky Six" stocks to avoid last October – and why it firmly remains there – is because I'm old school. I focus on fundamentals and tune out exciting stories told by master salespeople.

To be clear, I've long said that CEO Elon Musk is one of the all-time greatest visionaries, entrepreneurs, and engineers, and that humanity owes him a debt of gratitude for what he has accomplished at Tesla and SpaceX.

But how Tesla has a $1.4 trillion market capitalization in light of its dismal financials is beyond me...

After incredible growth from inception through 2022, revenues have flatlined and operating income has plunged over the past decade, as you can see in this quarterly chart:

Free cash flow ("FCF") is also flat over the past four years:

No wonder the stock is down from its late 2021 level above $400, as you can see in this 10-year chart:

Yet the stock still trades at a preposterous valuation. At yesterday's closing price of $373.72, it trades at 178.8 times this year's consensus analysts' earnings estimate of $2.09 (which I suspect is too high).

For more on the bear case for the stock, read this X post by veteran investor George Noble. He digs into Tesla's latest filings and does the math on what the share price should actually be – somewhere between $50 and $70.

So, what exactly are investors paying for? He concludes:

You're paying for a STORY. You're paying for PROMISES that keep getting pushed back, technology that keeps falling short, and a business plan that requires spending $25 billion a year while the core product sells fewer units at declining margins in a market where California sales just fell 24% and the federal [electric vehicle] tax credit is gone.

I managed the number one mutual fund in America. I founded two billion-dollar hedge funds. I've been doing this since 1981.

And I am telling you:

Tesla at [current levels] is one of the most egregious mispricings I have seen in my entire career.

THE CRASH WILL BE EPIC

Why would anyone own this stock at anything close to this price? To answer that question, I turned to my longtime analyst, Kevin DeCamp, who has owned the stock for more than a decade (and, to his credit, made a fortune)...

He gave me permission to share his analysis:

Tesla beat earnings-per-share estimates by $0.06, so the stock initially rallied roughly 4% in after-hours trading on Wednesday. But then it fell because investors were disappointed by a few things during the conference call...

First, Tesla increased guidance for capital expenditures ("capex") this year from $20 billion to $25 billion. That's a massive jump – nearly three times last year's $8.5 billion – and a significant number for the least profitable Magnificent Seven company. Worse yet, this may be a drop in the bucket compared with the potential capex ramp needed to fulfill Tesla's ambitions for its "Terafab" – its planned, massive semiconductor fabrication project in Austin, Texas, aiming to produce custom AI and memory chips for Tesla, SpaceX, and xAI.

Second, AI and robotics didn't come to the rescue – and Musk attempted to bring down expectations for the robotaxi rollout, which he has been overpromising since last June.

He commented on the earnings call: "I think it's not going to make sense for us to deploy unsupervised FSD or robotaxi large scale when we know that there are major architectural improvements to the software that can improve safety."

This raises the question: What will Tesla do with all these Cybercabs it's manufacturing right now, which have no steering wheels, if the software isn't ready?

Sure, Musk did warn that the early production rate of this entirely new vehicle platform will be "agonizingly slow," but what happens if the production ramp gets way ahead of the software capabilities?

All of these uncertainties led the stock to sell off a bit.

That said, Tesla continued to prove that its auto business has stabilized and it's well on its way to becoming more of a Software as a Service company, with supervised FSD sales continuing to show massive, accelerating growth – 51% year over year with 1.28 million active subscribers. This high-margin software was a big factor contributing to the earnings beat and the multiyear-high gross margin of 21.1% for this seasonally weak quarter.

I can attest that the FSD version 14 update is a game changer, and it's beginning to show in the numbers and Tesla's sales strategy. On the call, the chief financial officer stated that "we have evolved our vehicle sales strategy, where we now emphasize FSD as a product and vehicle as only the delivery mechanism."

This solid business foundation, coupled with Tesla's $35.5 billion in net cash, will allow it to fund its AI and robotics ambitions until its robotaxi business starts to produce substantial amounts of cash flow, in my opinion – and I think the market agrees, as evidenced by the stock's high valuation.

Tesla has grown into a global AI, robotics, energy, and transportation behemoth with six new factory lines currently under construction and a long list of ambitious plans, which are summarized nicely in this X post.

Although the robotaxi rollout is going slower than earlier guidance, cumulative paid robotaxi miles (albeit a majority of them with a safety driver) were up 179% quarter over quarter to 1.7 million. Not bad for a slow rollout:

In addition, the small number of reported accidents were minor – at very low speeds with no injuries. And as the software improves, there has been a rapid increase in miles traveled between incidents.

These promising trends are likely why Tesla continues to increase fully autonomous robotaxis (i.e., no safety drivers) in Austin and started the service in two new cities (Dallas and Houston) with a few unsupervised cars right off the bat. However, they are clearly not at a safety level where Tesla is confident to fully scale.

On the surface, Tesla appears to be far behind Waymo, which started removing human safety drivers five years ago. However, Tesla took the harder path with a vision-only approach (just cameras, with no lidar or radar). And once it clears a safety bar, it can literally manufacture the current total Waymo robotaxi fleet in one afternoon at a much lower cost.

As Musk seemed to imply on the call, the fleet hasn't yet cleared that "safety bar" to make robotaxis at Tesla scale a smart idea at this point.

Although I'm a bit disappointed in the new guidance for robotaxi deployment, I'm not surprised, and I trust Tesla's judgment on when it will be time to put the pedal to the metal. In the meantime, Tesla is working out the kinks and logistics of running a robotaxi business and currently hiring in 39 cities for all different types of robotaxi support staff.

Right now, Tesla makes roughly $7,500 in gross profit per vehicle. When the robotaxi fleet is ready to scale, each Cybercab will cost roughly $25,000 to produce and could easily generate $25,000 to $50,000 per year in revenue.

It's difficult to say when this inflection point will be, and execution risk is high. But Tesla has all the pieces of the puzzle in place to change the world practically overnight when it gets there.

Thanks for sharing your analysis, Kevin! An important mark of a good investor is the willingness to actively seek out and carefully consider contrary viewpoints – and change one's mind if warranted.

I now better understand the bull case for Tesla. But I'm still not convinced, so I would continue to avoid this stock.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.

P.P.S. I became a father 30 years ago today. Happy birthday, Alison! Here are pictures from then and now: