Will Tesla Ever Recover?

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Will Tesla Ever Recover?

In this episode, we will cover:

• Intro and Market Overview
• Tesla Q2 Earnings: Revenue and Free Cash Flow Drop
• CapEx Surge and R&D Investment Explained
• Update on Low-Cost Tesla Model
• Robotaxi Rollout and FSD Expansion
• Tesla’s Energy Business Growth
• Optimus and Dojo Updates
• The Power of Tesla’s Vertical Integration
• Tesla's Financial Health and Balance Sheet
• Future Outlook: AI, Robotaxi, and Buybacks
• Why Tesla is "Better Than Cash"
• Q&A: Tesla Valuation, Buy Timing, Strategy 

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salam@practicalislamicfinace.com

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Transcript

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assalamu alaikum everyone I hope you are doing well today is thursday july twenty fourth and yesterday after uh market closed we got the tesla earnings and investors were disappointed with what they saw and the performance on the earnings call wasn't that great energy was low um Some of the comments that were made were not exactly what investors wanted to hear regarding timelines, regarding specifics or lack thereof. And today in this live, I'd like to go over exactly what happened and my view of Tesla in light of its most recent earnings. So looking at the indices before we jump in. The Russell was down one point three eight percent. Dow Jones down point seven percent. S&P was up slightly. Nasdaq was up point two five percent. Crypto took a bit of a breather. Pudgy Penguins was down ten percent. That's why we always take profits, folks. Doge is at one point five percent. Down, that is. Doge is down one point five percent, sold down one point three percent. And Bitcoin was, let's call it flat. It's currently trading at one hundred and eighteen thousand. All right. Let's talk Tesla and what I think. All right. so here were the main low lights from the earnings report so tesla revenue in q two it slid twelve percent from a year ago so compared to q two twenty twenty four down twelve percent to twenty two point five billion now if you'll recall before this earnings I told you guys that we already know the earnings are not going to be anything to write home about we already know the deliveries we know that the sales are down we expected this so nothing here that is out of the ordinary I don't think Now, free cash flow, a lot of people had things to say about it. Free cash flow is down eighty nine percent year over year to one hundred and forty six million versus expected seven hundred and fifty million. Here's what's very important to understand about free cash flow. Free cash flow equals operating cash flow minus capital expenditures. So when free cash flow is down, either operating cash flow is down or capital expenditures are up or a combination of both. And we're going to see that the reason that free cash flow is down as much as it is, is because the company is reinvesting aggressively. It has dramatically increased the amount of CapEx that it is spending. And we'll talk about that. So that's not necessarily a negative for me. I want to. So the more a company spends on CapEx, the more it spends on R&D. And we'll talk about that as well. the more potential future potential the company has assuming that the management is competent and it's using the r d capex dollars spent wisely and I think this is the case in tesla and another low light I would say is tesla's new low-cost ev platform is moving slowly and we did kind of get some color on that uh we're in the lower cost model for tesla is expected to be basically a smaller Model Y, a smaller version of the Model Y. And it's doing this in order to take advantage of the infrastructure that it already has and get to production sooner rather than design a new model from the ground up and the production process for that new model would need to be put in place and that will take longer take more additional investing and to be honest I don't even though I was excited for a new model from Tesla, I don't necessarily fault them. I think the Model Y, especially the new, the revamped Model Y that came out not too long ago, it's a beautiful car. And so a smaller version of that is totally fine by me. Again, I was expecting a... a completely new model, but a smaller version of this revamped Model Y still looks pretty cool. And especially when you add to that potentially full self-driving capability, unsupervised full self-driving capability, I think the potential for this new model, the smaller car to enhance sales in Europe, in China, other places that like smaller cars more than the united states the potential is is pretty high all right now let's talk about the highlights and I thought there were many so first of all robotexy the plans are a pace to scale unsupervised robotaxi experiment that's currently going on in austin throughout the rest of the year Elon Musk did mention this, and I don't know how accurate this is, but he mentioned something on the order of half the population of the United States maybe having access to Robotexy, some version of the Robotexy service within the next six months to a year. That would be fantastic. Obviously, that would bode well for the stock. But even if we achieved, I think, twenty percent of that, it would still be pretty darn good. And investors could extrapolate from that and say, okay, this is how long it's going to take to cover the entirety of the United States, extrapolate the cash flows and so on. Megapack deployments grew sixty percent year over year in Q two. This is their energy storage business. And this is currently their most profitable business is growing at sixty percent year over year. That's not bad. Margins are very strong. Management says thousands of Optimus units could be deployed by year end. That's going to be huge for the company and for investors uh thinking about what could be the ai fleet learning dojo training supercomputer all of these projects seem to be tracking well if you look at uh dojo two that's expected in twenty twenty six and uh by the way it's expected to reach a compute equivalent of a hundred thousand nvidia h-one hundreds the ai five chip that's targeted for twenty twenty five twenty twenty six and already they've started the ai six the next generation of their chip and the dojo three they're already in concept So and the FSD version twelve, the most recent version for the full self driving, the usage for that is rising. Take rates are rising. And by the way, half of Tesla owners don't use full self driving. So there's a huge addressable market just among the Tesla owners already. Let alone people who don't own Teslas yet. And Tesla has reported ten X lower accident rate compared to human driving. I think that's a very compelling selling point for Tesla vehicles. And by the way, you know, a lot has been made about Tesla sales in Europe and other geographies in the world. And why aren't they competing with other companies, Chinese companies often? And a lot of these jurisdictions have not authorized the use of supervised full self-driving in their areas. And therefore, the car is being sold, I think, without its main selling point, which is the full self-driving. That's the main selling point. And so it's just competing then on price and size, aesthetics, and range. And Teslas tend to be of higher price than Chinese vehicles. And so once these jurisdictions start allowing full self-driving cars, And especially once unsupervised full self-driving starts to be available, then the dynamic is really going to change. And I think you're going to see an uptick in sales in a dramatic way. And I've said this before on this live. I'm not really concerned about sales almost at all for Tesla. What I care about is unsupervised full self-driving working. and the authorizations that they need. Because I think basically the regulatory approvals at this particular point are a bigger hurdle than the technology itself. I think the technology is basically there. I mean, it's working in Austin. But the regulatory approvals, that's really the bigger hurdle at this particular point. Once the Robotaxis are available, then From Tesla's perspective, it basically could use every single car that it makes, regardless of how many it's able to sell. and simply add them to their Robotaxi fleet and see which geographies require more cars, add them there, and it can keep all of the revenue from those cars to itself. So that's why I'm not really hung up about their sales, even though I do think that sales will recover. and will rebound in a very strong way. And it's really important to realize that Tesla has essentially transitioned from an EV maker to a full stack real world AI platform from end to end, from raw material All the way to the robot and everything in between, Tesla now controls its own destiny, controls its own technology, controls its own products, everything that you need for a real world AI, Tesla has its own version of it. And it's basically leading in this space, which I believe will transform the world perhaps more than any other space in the next few years. So this is very important to understand. No other company has the type of end to end vertical integration that Tesla has. And to be more specific, They have their own chips, they're designing their own chips. And eventually I believe that they will wane off of the Nvidia chips and they use exclusively Tesla chips. And eventually I do believe that they will start selling those chips to companies and they may end up being one of the main competitors for Nvidia. They're using those chips to train massive neural networks on real world data from their fleet. Right now, there's four million Tesla cars gathering data every single day. No other company has this type of bank of data. And then deploying that intelligence that it uses from processing this data, deploying that back into the vehicles, into the robots, which accumulate more data, which They used to train and learn more and improve and so on. The virtuous cycle continues. No other company controls its own destiny like Tesla does in this regard. Now, let's look at the income statement and look at some of the particulars. What stood out to me? If you look at research and development in Q two of twenty twenty four, that's right here. And a lot was made about, you know, missing expectations. What's going on with margins? Well, in Q two twenty twenty four, R&D was around a billion dollars. In Q two, twenty twenty five, it was around one point six billion dollars. So this is an investment in itself. And the more competent management invests in R&D, invests in capex, the more the spring is coiled for the stock and the more future potential it has once it is released. I don't look at R&D as a loss at all. I look at it as a positive. If you have a long-term mindset, then you look at it in the same way. If you have calls and you want the stock to go up in the near term, well, then you don't care about research and development. You care about what is the headline. And that's not where we are. So that's important to understand. And another thing that stands out to me is cash and cash equivalents. That's this number right here. So in Q two of twenty twenty four, that was at around thirty billion. Now it's at thirty six billion, thirty six point seven billion. So the company is producing cash despite all of its investments, despite all of its CapEx investments, the company is producing cash and the total assets are growing faster than the total liabilities, as is evidenced by the stockholder equity. We went from sixty six billion in Q two of twenty twenty four to seventy seven billion in Q two of twenty twenty five, which is up from last quarter, which was at seventy four billion. So progress is being made here. It's not like the company is losing money. It's not like the company is burning cash. It's not like the company, despite this aggressive reinvesting in itself, it's not like the company is struggling. They still have a pristine balance sheet. Their debt is basically a non-factor for them. They have a pile of of cash that they can use now close to thirty seven billion. And they mentioned in their update to investors that they have enough cash for their future plans. So we shouldn't expect any major dilution. In fact, actually, I don't want this to happen. I'd rather they reinvest in R&D and and CapEx, but I would not be surprised if in the next few years, once this Robotaxi thing starts producing the avalanche of cash that I expected to produce for the company to start buying back shares. I think that would make a ton of sense. But not now. I think right now, more R&D, more CapEx, let's get the production capacity growing as fast as possible. I'm fine with that, even if I have to wait another quarter or two or three for the stock to pop. Now, cash from operating activities is still strongly positive. And this is what I wanted to point out with regards to free cash flow, because essentially free cash flow, as I mentioned, is cash from operating activities minus the capital expenditures that the company is making. And so if you look at the net cash flow provided by operating activities, that's two point five billion. So the operations are providing cash. It's not like the free cash flow. It's not like the operations provided, you know, one hundred and fifty million in cash, whereas it was expected seven hundred million, which some people may look at free cash flow and say, And I think that that's what that means. No, the cash from operations were two point five billion. The company invested in capital expenditures, two point four billion in capital expenditures. So more plants, increasing capacity, increasing production lines. investing in itself, buying new machinery, all of that is where the cash went. And so I'm fine with that. So what if free cash flow was in seven hundred million? The company is sitting on close to thirty seven billion in cash. Why do I care if it's seven hundred or one hundred million in free cash flow? So long as that money was used to grow the potential for the company, I'm fine with that. So here are my takeaways. The rollout for the robot taxi is potentially exponential, right? The biggest the bottleneck here isn't the technology. The bottleneck is the approvals, the regulatory approvals. The quicker you can get regulatory approvals, the quicker this thing rolls out. Remember, you don't need geofence areas to roll this out. You just need regulatory approval and vision, which the cars have. Every Tesla from hardware four, which rolled out in twenty twenty three, has the vision. So and everything that is coming off of their production lines has this vision that would allow them to become autonomous. So rollout of Robotaxi could potentially be exponential, aggressively exponential, I'd say. Smaller Model Y, it's not what I was hoping for, not as cool as a completely new model, but the Model Y looks pretty darn cool as it is. A smaller Model Y makes sense to me. It would make it more appealing for people in Europe, other places in the world that are more accustomed to smaller cars. Unlike us in the United States, we have huge cars, huge waistlines, huge everything here in the United States compared to the rest of the world. Lower rates, which are expected Later this year, lower rates should help sales in auto, in energy, everywhere. It should help this company a lot. Now, the strong changes in the financial picture may take until the second half of twenty twenty six when you start to see really the needle moving for the financials in terms of Robotexy and maybe even Optimus and who knows, maybe Dojo. Other companies may contract Tesla to use it to do their training for them. Who knows? But I suspect primarily for Robotaxi, for this to hit the financials in a big way, maybe we take till second half of twenty twenty six. This is not to say the stock will wait until that point. It's possible that if the rollout happens aggressively and hey maybe we're reaching half the population of the united states or it's you know we see a path to do that within the next few months as elon musk was was stating then investors are going to price that in before it hits the financials they'll do their own calculations before the formal ones come out no other real world ai company has end-to-end integration now I currently, my position is basically, I'm viewing Tesla as cash, basically. If I get profits from somewhere else, I'm going to put it in cash. If I take profits, I'm going to put it in cash, assuming there isn't another opportunity that interests me. Put it in cash, that means for me, it's in Tesla. Eventually, this thing is going to pop. I don't know when, but In the meantime, I'm just going to consider it to be cash. When it dips, I'll probably buy more. But I'm sabur. I'm patient. However long it takes, it takes. But my conviction level in the path that this company is on is very strong. And yes, things take longer than expected. That's for sure, but no other company is trying to do what this company is trying to do. It is revolutionizing the way we travel, and it's going to revolutionize the labor force. Optimus may end up being the biggest product of all time. So with that being said, the matter requires patience. I don't know what's going to happen. I didn't sell a single share after the earnings. If anything, I was considering buying, but there are other opportunities that I think in the near term are more compelling. So I'm focused on those. But the time for Tesla will come. And in the meantime, I'm considering it better than cash. Let's say a money market account. Halal money market account. It's going to give me a return. Maybe it's a modest return, but that's fine. Eventually, it's going to hit its stride. If you want to follow our portfolios, make sure to join PIF. Maybe you can become like Sheikh Pandey, who joined the ranks of millionaires on the backs of one of our picks. Congratulations again to Sheikh Pandey. Thank you for sharing your experience. And hey, Always not bad for Tesla today. Donald J. Trump, to make sure you don't confuse him with Donald E. Trump or Donald F. Trump. Donald J. Trump mentioned that he's not really against Elon or Tesla and he's not trying to do anything harmful to that company. He wants them all to succeed because he's a patriot and Tesla is an American company. Or at least this is what this tweet suggests. So with that piece of good news, we'll go to questions, inshallah. Haroon, we got hit in the kidney from Tesla. Alhamdulillah, we're up for the challenge, inshallah. Salamat, Dr. Khalid. Nice to see you. All right, low lights. Muhammad says... assalamu alaikum wouldn't it be better if we rotate to something else rather than sitting on this perhaps but I just don't uh I don't want to take that risk well I've waited uh for as long as I have I think we're in the event horizon uh for this stock that is you know uh we we are on the the paths that they've taken whether it's robotaxi or optimus or even dojo their ai chips energy the path that they're taken have enough momentum I think to take them to uh really the next level and so You're welcome to do whatever you want. As I said, if I'm investing new money, I'm probably going to put it in other names because it may take a while, but it may not take a while. It may surprise everyone. Maybe if they, as they were mentioning, expand to the Bay Area within the next few weeks and all of a sudden expand to three or four other major cities. investors may take a second hard look at this company. So I'm not going to be rotating. I haven't sold a single share of Tesla. I may buy more if it continues to dip. I was pretty surprised that it stayed above three hundred. To be honest, I thought it was going to go down more, but staying above three hundred is pretty encouraging. Who knows what happens tomorrow? But eventually this will pay off and I think we'll forget about the wait time. When would you consider doing a swing trade with Tesla? I think I answered that. Think about this when it hit a new all time high earlier in the year. Yeah, I mean, hindsight is twenty twenty. Obviously, we didn't know what was going to happen. I think definitely tariffs affected margins, which was part of the picture that investors didn't like. But hindsight is twenty twenty. I wouldn't beat myself up too much about that. I think that, you know, in the first half, we were expecting the lower cost model that didn't come. All of these things, it's not like they're They're not coming. We're seeing progress. You know, the unsupervised full self-driving is working in Austin. Just, you know, things are not going as fast as some people may hope. But we're definitely making progress in the right direction. And then I think it's, especially as it relates to Robotaxi, it's going to be slow, slow, slow, and then all of a sudden. And so I think that investors may be caught by surprise. I don't want to be one of them. Young SF or young ESF or young YSF? I don't know. Young Yusuf, I'm going to assume. Assalamu alaikum. I'm a new member. Congrats on becoming a new member. Would you recommend waiting a bit more for Tesla to fall before buying or going for it now? Now, I would say... a dollar cost average. And I would also say, make sure you're looking at our upside conviction score and look at the names that are in their buy zone and start with the first name and moving down that list. Um, I, so building the dividend portfolio, I would start with the companies that are in their buy zone. And then once other companies become in their buy zone, try dollar cost averaging into them as well. So I'm like American. Uh, well, we have actually, uh, a number of, uh, earnings reports coming next month, uh, which, uh, I think inshallah will be good, uh, for a lot of our companies. Malik says, Salam alaikum M phase has gotten beaten on beaten up recently. You think it's time for it? I'll take another look. Last time I looked at it, it was still not time, but maybe I'll take another look. Um, Ali Imam says, I'm not worried about free cash flow due to heavy cashbacks, but how do you justify a PE of one hundred and thirty for a company with double digit decrease in revenue? I understand your question. It's a legitimate question. But again here and I've done the math on it for robo taxis. I think with the conservative. A multiple. I've done the math on this live before. With a conservative multiple, a robot actually on their own could add, you know, two to three trillion to valuation. So The PE, especially for a company that is, I think, on an S-curve, the PE, since it's considering last year's earnings, is not really a good valuation metric. You need to look ahead at the free cash flows that you're expecting in the future, especially with regards to Tesla. As I mentioned, this is a company that is going from an EV company with tough margins to, I believe, a real world AI company that's going to have much more generous margins. And so the valuation and the multiples are going to change dramatically. I think really from this earnings, you know, if you're a bear, you stayed a bear. If you're a bull, you stayed a bull. Nothing really has changed. We knew deliveries wouldn't be great, but there's a big difference between flat revenue and a ten percent decline. Well, keep in mind, Ali, there are there's a lot of things that are in play here. So. The the price of the car has gone down, so the average selling price has gone down. And. the interest rates haven't gotten any better. And we're at a point where we believe that interest rates are going to come down. And in a lot of places, especially places like Europe, they haven't allowed Tesla owners to use supervised full self-driving. So basically, it's like Tesla is fighting competition with one hand tied behind its back. If users aren't allowed to use unsupervised full self-driving, well, then the the value of the car is not the same. And so I think all of these things that I mentioned are eventually going to solve themselves. And when that happens, I think sales will recover, revenue will recover. And as I mentioned with regards to sales in particular, it's not really that concerning for me because so long as Robotaxi works, they'll be able to use every single Tesla they can make. Malik says, how long have you been buying holding Tesla? Since was the first time I bought. Uh, robo taxis had cameras on their roof. Isn't that a big concern, uh, given that their advantage over Waymo is that they don't need to map the area. So that's how they started. Uh, but not all of them had cameras on their roof. Uh, they did start with like a geo fenced area and not typical, uh, but that's how they started. And, um, and currently there are robo taxis operating in austin without additional cameras just with the hardware of the car and I believe that this is going to expand to other geographies Brother, regarding other names on the watch list, I add them for people to add diversification if they'd like to. And so all of them are companies that we've vetted very closely and we expect them to do well. So Alhamdulillah, ASPI doing well is proof of that. What do you think about United Healthcare? I don't like United Healthcare. I don't like their product. I don't like their company. And so I don't really care about valuation at this point. Does ASML Holdings have anything to do with Israel? Not to my knowledge and not in a material way that would cause discomfort. Supermax says, Salam, thinking the best way to buy Tesla is wait patiently to break out and consolidate above three sixty till that time, invest in BTC and enjoy the upside momentum. That's totally reasonable. Certainly BTC seems to have a lot more momentum than Tesla does, especially on a day like today. I tend to invest in a contrarian manner, investing in things that I believe in, have high conviction in, but people are down on because I think that you get the best prices. And assuming, of course, that I don't mind waiting. Now, with regards to Tesla, as I mentioned, I am holding right now. I haven't bought or sold any shares since the earnings. SPIF members know. And therefore, that's my plan for right now. If we get a further dip, I will definitely be adding. By the way. I agree with you on Tesla. In my opinion, I think it's going to be the biggest company in the world. I appreciate you. Thank you, Gex. I appreciate you as well. And I agree that it definitely has the potential to become the biggest company in the world. If you look into the future, what's the most prevalent industry going to be? Probably real world AI. Who has absolute domination in that field? I think Tesla. um for asml holdings check out our buy below sell above prices and by the way congrats on people who are holding comfort systems that beast continues to deliver uh so hamdullah with that being said love you all thank you for tuning in leave a like if you enjoyed this live and until next time make sure to take care of yourself assalamu alaikum and peace be upon you all