The Bottom Line:
- Google confirmed a slowdown in AI profitability, while Tesla complained about high Nvidia chip demand forcing them to make their own Dojo chips.
- This earnings season could lead to a market correction, with the author trimming positions and increasing cash positioning.
- Tesla’s regulatory credits increased 3x year-over-year, but concerns remain about production, deliveries, and pricing power.
- Tesla’s valuation is very high, with a P/E ratio of 100, and sentiment and momentum have been negatively impacted.
- The author’s 2×2 investment framework suggests near-term pricing may not be very exciting for Tesla.
Google’s AI Profitability Slowdown
AI Profitability Concerns Loom for Google
Google’s recent earnings report confirmed a slowdown in artificial intelligence revenues, with the company indicating that more patience will be required before seeing significant AI profitability. While the quality of Google’s AI products and the output of their AI innovation continue to increase, the market’s expectations for immediate returns have not been met. This news has raised concerns among investors about the near-term profitability of Google’s AI ventures.
Balancing Innovation and Investor Expectations
As Google continues to invest heavily in AI research and development, the company faces the challenge of balancing long-term innovation with short-term investor expectations. The slowdown in AI profitability growth has led to questions about the viability of Google’s AI strategy and the potential impact on the company’s overall financial performance. However, Google remains committed to its AI initiatives, believing that the long-term benefits will outweigh the short-term challenges.
Navigating the Competitive AI Landscape
Google’s AI profitability concerns come amidst a highly competitive landscape, with other tech giants such as Microsoft and Amazon also investing heavily in artificial intelligence. As the race to develop and commercialize AI technologies intensifies, Google will need to demonstrate the value and potential of its AI offerings to maintain investor confidence and stay ahead of the competition. The company’s ability to navigate this complex landscape and deliver on its AI promises will be crucial to its long-term success.
Tesla’s Chip Manufacturing Challenges
Chip Demand Outpaces Supply
Tesla’s recent earnings report revealed that the company is facing challenges in securing an adequate supply of Nvidia chips due to the high demand for these components. As a result, Tesla has been forced to explore the development of its own Dojo chips as a potential alternative. While Elon Musk believes that Dojo chips could eventually become competitive with Nvidia’s offerings, Tesla still heavily relies on Nvidia chips for its current operations.
Dojo: A Side Project with Future Potential
Despite the ongoing development of Dojo chips, Tesla has emphasized that this project is currently a side venture and not the company’s primary focus. The Dojo chips are seen as a long-term solution to Tesla’s chip supply challenges, but the company acknowledges that it will take time before these chips can be produced at a scale that meets Tesla’s needs. In the meantime, Tesla will continue to depend on Nvidia chips and work towards securing a stable supply chain.
Navigating the Chip Shortage Landscape
Tesla’s chip manufacturing challenges are not unique, as the global semiconductor industry has been grappling with supply chain disruptions and increased demand from various sectors. The company’s decision to explore in-house chip development demonstrates its proactive approach to mitigating the risks associated with relying on external suppliers. As Tesla navigates this complex landscape, it will need to strike a balance between maintaining its partnerships with established chip manufacturers like Nvidia and investing in its own chip development capabilities to ensure long-term stability and competitiveness.
Tesla’s Regulatory Credit Surge and Production Concerns
Regulatory Credits Boost Tesla’s Earnings
Tesla’s recent earnings report revealed a significant surge in regulatory credit revenue, which increased threefold year-over-year and doubled sequentially from Q1, reaching $890 million. This increase can be attributed to the reduced competition for these credits as other automakers shift their focus away from producing electric vehicles. The regulatory credit boost played a crucial role in Tesla’s strong financial performance for the quarter.
Interest Rate Buy-Downs and Production Concerns
While Tesla’s Q2 production and delivery numbers were impressive, the company’s reliance on interest rate buy-downs to drive sales has raised concerns. These buy-downs have contributed to a lower average selling price for Tesla’s vehicles, which currently stands at around $47,474. Additionally, Tesla’s capital expenditure reduction in Q2, followed by a ramp-up in Q3, suggests that the company may face increased expenses in the latter half of the year.
Slowing Supercharger Growth and Cost Reduction Focus
Tesla’s supercharger network growth has slowed to just 3.5% sequentially, which translates to an annualized growth rate of approximately 14%. This slowdown is particularly concerning as Tesla invites other charging customers to use its supercharging network, potentially leading to increased congestion. Furthermore, Tesla’s continued focus on cost reductions, despite its growth objectives, has raised questions about the company’s priorities and the potential impact on its long-term expansion plans.
Tesla’s Lofty Valuation and Sentiment Shifts
Lofty Valuation Raises Concerns
Tesla’s valuation remains high, with a forward year PE ratio of 100 and a PEG of 3.1 for the next four years of growth at 32% EPS growth priced in. This valuation is considered expensive for a manufacturing company, which should typically have a PEG closer to 1.67. The recent earnings report and the subsequent 7% drop in stock price have further highlighted the concerns surrounding Tesla’s lofty valuation.
Sentiment and Momentum Take a Hit
The postponement of the Robo Taxi event to October 10th has dealt a blow to Tesla’s sentiment and momentum. This delay has been seen as a momentum buzz kill, which isn’t great for the stock. The earnings call has likely accelerated the negative sentiment, as the company missed on EPS for the fourth straight time and is expected to go negative year-over-year on vehicle deliveries.
Pricing Power and Bankruptcy Risk
Despite the challenges, Tesla does have in-class pricing power, which is a positive factor. Additionally, the company does not face bankruptcy risk, which is another point in its favor. However, the high valuation and the negative sentiment and momentum have overshadowed these positive aspects, leading to concerns about the near-term pricing of Tesla’s stock.
Navigating the Uncertain Market Landscape
Potential AI Selloff and Market Correction
The recent earnings reports from Google and Tesla have raised concerns about the potential for an AI selloff and a broader market correction before the upcoming election season. While the long-term prospects for AI remain promising, the near-term challenges in terms of profitability and growth have led some investors to reassess their positions. The combination of slower AI revenue growth, higher valuations, and the uncertainty surrounding the election has created a perfect storm for a potential market pullback.
Trimming Positions and Increasing Cash Holdings
In anticipation of a potential market correction, some investors have begun trimming their positions and increasing their cash holdings. This cautious approach reflects the growing uncertainty in the market and the desire to mitigate risk in the face of potential volatility. By reducing exposure to high-growth, high-valuation stocks like Tesla and increasing cash positions, investors aim to weather any short-term market turbulence while maintaining the flexibility to capitalize on opportunities that may arise.
Balancing Short-Term Challenges and Long-Term Potential
Despite the near-term challenges faced by companies like Google and Tesla, the long-term potential of AI and other innovative technologies remains intact. Investors must navigate the delicate balance between short-term market fluctuations and the long-term growth prospects of these companies. While the current market landscape may be uncertain, those who are able to maintain a strategic perspective and adapt to changing conditions will be better positioned to benefit from the transformative potential of AI and other disruptive technologies in the years to come.
