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Tesla is right now trading completely out of the realm of reality: GLJ Research Founder & CEO

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Gordon Johnson, GLJ Research Founder & CEO joins the Yahoo Finance Live panel to discuss what to expect with Tesla earnings on Wednesday.

Video Transcript

ZACK GUZMAN: Expectations once again running high. The company expected to post its sixth quarter in a row of profit. We'll see if that actually happens here. For more on what to expect I want to bring in our next guest, Gordon Johnson, is GLJ research founder and CEO. And Gordon, expectations are running high for this company, no doubt, due to the performance we've seen. What are you expecting to hear once we get the latest from Tesla?

GORDON JOHNSON: Yeah, so I think that, look we got to admit, Tesla sold 500,000 cars last year. Two years ago, or even a year ago, that was ahead of expectations. And that's something that we have to credit the bulls with. But you also have to consider, we didn't expect Tesla cut prices 14 times last year. But getting to your question, listen, Tesla seems to have an uncanny ability recently to cut the price on its car yet report flat gross margins.

In fact, we think that if you look at what Texas is going to report, they're going to do about, they did 180,000 cars, $50,000 ASP, put a 20% margin on that, assuming their margin stays flat, $1.3 billion and SG&A and interest, that gets you to a pre-credit profit of about $500 million. So we think the credit profit could be anywhere from $0 to $400 million. So you're talking about a gap profit number of anywhere from $500 to $900 million, the [? street's ?] at 858.

But with the stock trading at 200 times forward earnings versus the average for the car industry being 7.5 times, we don't think that's what's important. We think what's going to be important is what they guide their deliveries to. And I think people are expecting that number to be anywhere from 850,000 to one million cars. We think the number could be as low as 800,000 cars. So we think that number could come in as a slight disappointment.

AKIKO FUJITA: Gordon, obviously you got a lot of attention last year with your bearish call on the stock itself. When you look at the fundamentals for the company and the expectation here, what will it take for you to become a little more bullish? In other words, if you're talking about delivering numbers, for example, what do you need to see it come in on to fundamentally change your view on how the stock should trade?

GORDON JOHNSON: I mean, Tesla's right now trading completely out of the realm of reality. It's nowhere close to reality. Our number for Q4 was just under 182,000 cars sold. They did just under 180,000. So it was close, but they missed us by a little bit. But listen, in the roughly 30 quarters that Tesla has been a public company, excluding credits, they've only been profitable four quarters, the most recent of which was 3Q '19. So what we need to see is consistent profitability. But not just profitability, but significant growth in that profitability to justify where the stock is trading at.

Listen, Tesla cut the prices on their cars 14 times last year. If you cut the price, I mean, if Tesla cuts its price for the car to $5,000, I mean, depending on how low it goes, there's infinite demand for volume. So the question is, how is Tesla reporting net profit margins that are above ICE car manufacturers-- internal combustion car manufacturers-- despite the fact that making ICE cars more profitable than making a battery. The battery cost is much more expensive as the price of the engine as the ICE car.

We don't know that. But just given what they've done historically, we're going to just assume that they're going to continue to do this until somebody comes in and really looks at these numbers in detail. But what gets us more positive is them reporting profit excluding credit revenues, which are one time, basically taxpayer funded sales, which they're going to effectively decline significantly this year, completely go away. We believe next year, as everybody's making EVs now, we need to see them be profitable in the actual selling of cars.

ZACK GUZMAN: Yeah, one thing that would stand out maybe to our viewers listening to you now relative to before, is there's a lot less concern around where a cash position is as a company. Before, obviously there were a lot of risks when Tesla was really trying to struggle. The company was struggling to raise money and was looking pretty close to some serious problems there. But not the case at all anymore. They continue to ride the wave here. So what are the expectations maybe there as they balance that with the pretty new plants being built as well as leading to the growth in China.

GORDON JOHNSON: Right, so again, listen, I think are going to guide to roughly 800,000 cars sold this year. I think that's going to come as somewhat of a disappointment to the bulls out there. With respect to the cash position, listen, last year, I'm sorry, the year before, they said that they were going to have a million robo taxis on the road and the cars were appreciating assets. Again, they've cut the price of their cars 14 times last year. And China alone, the price of their Model 3 SR plus was down 30% over the year.

So clearly, they weren't appreciating assets and they don't have one robo taxi on the road. On that promise, they raised billions of dollars of money. But even Elon Musk admitted or suggested that they were close to potentially facing a liquidity event before they did that. So they've used some prognostications that didn't come to fruition to really cushion their cash position. So we're not worried about that. But think about this, VW is going to have 600,000 cars of capacity in China next year based on their guidance.

If they're just at 50% utilization, that's double the amount of cars that Tesla sold in China in 2020, the VW is looking to sell in 2021. And they priced their highest end car below the cost of the Model 3, not the Model Y, but the Model 3. We thought the ID 3 and ID 4 were going to challenge the Model Y. So there's significant competition coming into China this year. What happened when competition came into Europe? Tesla's market share went from 30% in Q4 to roughly 10% in Q4 of '19, to roughly 10% in Q4 of 2020. They lost significant share. So when competition comes in, they're losing share. And this is a company that is basically achieving profitless growth by cutting the price of their car to keep volumes flat. That's not sustainable. So we're not worried about their cash position. But you need to see them significantly grow their business to justify the valuation. And with all this competition coming in, we think they're going to face problems this year. Admittedly, again, the stock is detached from reality. So we don't think that reality really starts to hit until Q2-Q3.

Because we think they have a lot of credit revenues they can recognize this quarter, next quarter. But we think it is going to hit this year.

AKIKO FUJITA: Gordon, on the issue of capacity for Tesla Shanghai plant. What's your expectation on Model Y?

GORDON JOHNSON: Right so the expectation on Model Y is they're going to do about, I think roughly 200,000 to 300,000 cars this year. But listen, so to get to 800,000 to 850,000 cars for Tesla this year, the assumption is they're going to do about 400,000 to 450,000 cars in China. That would suggest a market share of around 30% in China this year. What happened to their market share in China in 2020? It went from about a high of 30%, exited the year around 14%, and that was despite I think five price cuts in China, 30% on one of their highest selling model car.

So despite cutting the prices significantly, they lost significant market share. And that's before the ID 394 hit the and the EQC from Mercedes hits the market. So for them to get back to 30% market share, we think they're going to have to cut prices significantly. So we think that's going to prove a hard target for them to hit.