The Collapse of Tesla Stock.

a few months ago I warned that price

Cuts were coming to Tesla vehicles and

to be prepared for that happening well I

can tell you one thing Wall Street

wasn't prepared Tesla just cut the

prices of their vehicles in China with

for example the Tesla Model y seeing a

price cut from about 42 100 US dollars

down to thirty seven eight seventy five

that is a price cut exceeding at 10 and

it's basically mirroring now a seven to

eight percent price cut in the stock as

Wall Street continues to be concerned

that price Cuts in a recession are a

sign not of deflationary price fighting

but instead of demand concerns for Tesla

and a potential margin squeeze in this

video we've got to talk about that

demand concern we'll talk about a

commodity pricing and margin we'll also

talk about one of Tesla's big

competitors byd

first I want to mention that thank you

Tesla for finally reintroducing the

steering wheel option to the model S and

X now while I personally am a big fan of

the Yoke steering wheel I think that in

order to get new and a broader audience

of individuals buying Teslas outside

that core demographic of about 25 to 55

year old dudes historically higher

income dudes White Collar dudes and

dudes with um let's just say a little

bit of a tech background it's time to

expand the audience to women and to

people outside that age range and I

personally think one of the best ways to

do that is by having a traditional

steering wheel option and so thank you

Tesla for introducing the steering wheel

option back to at least the S's and X's

now don't get me wrong I understand that

the yoke is great for FSD visualization

but again if you're trying to transition

people from a legacy car to a Tesla so

don't change so much and so sticking

with the steering wheel in my opinion a

great option for people so now you can

choose do you want the Yoke or the

steering wheel you know people can

switch to the Oak in their second or

third Tesla all right but we need to

talk about byd and margin because after

all China is uh creating some issues for

Tesla we know this that's because China

is probably in a deep dark depression

right now it's so bad that China is now

lifting and reducing their three red

line rule for Real Estate because they

have destroyed the market by

implementing the three red line rule

destroying real estate developers

employmenting property values by over 40

percent that has led to a massive

decline in consumer spending in China

and a massive decline in people needing

to purchase vehicles in China especially

since a lot of people are stuck at home

sick or dying from well the sickness

going around now it's hoped that when

China reopens larger buyer demand will

come back but wait a minute why does it

seem like Tesla is seeing less

competition for their vehicles or I

should say less demand for their

vehicles while at the same time byd

seems to be killing it with vehicle

sales well there are a few reasons here

and we need to break those down number

one is 50 of byd's electric vehicle

sales are actually hybrids those are

generally lower margin vehicles for a

manufacturer because you have two

systems you have the electric powertrain

system and you have the actual uh ice

system the Legacy internal combustion

engine system inside the vehicle byd

however has performed pretty decently

even though the stock has had some hits

over the last year byd in just the last

30 days is up 8.5 percent most

automakers are down 12 and Tesla is down

over over 40 percent and that's not even

considering the big drop that Tesla is

facing this morning

so what's up with byd do they have all

the pp that Tesla wishes it has does byd

have all of the pricing power and Tesla

has none after all what is pricing power

if you have to drop your prices see a

lot of folks see pricing power as

diminishing when prices are reduced and

when prices are increased companies must

have more pricing power right because

obviously if you have less demand and

you have to drop the price for a product

that means you have less pricing power

right well the question is not that

simple generally pricing power in stocks

has to do with the combination of the

price that you're able to sell a product

for and the margins that you're able to

preserve so for example if you go into a

recessionary environment and every

company drops their prices what happens

to margins for those companies which

company is able to maintain margins as

potentially the cost to manufacture

products Falls and which company can

actually maintain substantial

profitability in the face of pricing

Cuts see in a perverse way dropping

prices in a recessionary environment

gives you that flexibility to increase

demand and if you can maintain margins

while doing that because your costs are

coming down you could actually argue

that you still have pricing power over

your competitors it's relative pricing

power so preserving margin is a key

dynamic in a pricing competitive

environment every company raises prices

when there's inflation but who can

actually succeed the most when you start

getting into a deflationary competition

well this is where I think it's worth

looking at the byd earnings report

ending June 30th which is the last six

month report that we get from byd and

what's fascinating in the last byd

earnings report is their gross profit

margin

byd's gross profit margin versus Teslas

keep in mind Tesla's gross profit margin

sits in excess of 25 at one point last

year it was in excess of 30 percent

without energy credits

that's incredible what's byd's gross

profit margin

well byd's gross profit margin is 5.3

percent that means Tesla has nearly five

times the gross profit margin as byd

that means even if Tesla's profit fell

in half

while Tesla is dropping prices Tesla

would still be making two and a half

times the profit per vehicle on a gross

profit basis as byds

that is an example of bottom line

pricing power which ultimately is the

most important aspect for stocks because

stocks are generally valued off of

earnings per share

so what about that net income number

well byd brings a total

of their top line revenue to bottom line

of

1.45 percent

Tesla brings about 13 percent to the

bottom line

so now when we look at nominal prices

that is how much is a vehicle actually

selling for sure we could take a

simplistic approach and say Tesla must

not have pricing power because they're

dropping prices but in a recessionary

environment can Tesla maintain the

substantial margin lead that it has over

the competitors to where they can

actually spur demand while still

actually making a lot of money in my

opinion pricing power for a company

diminishes when they actually see their

margins fall to what industry Norms are

and when you look at byd Ford or GM

especially Ford who loses money on

electric vehicles margins aren't that

great Tesla has the margin game figured

out and so they have the luxury of

reducing prices while maintaining

margins but will they maintain margins

well that's going to be revealed in the

next earnings report from Tesla but we

have a little bit of insight light into

at least commodity pricing and

valuations of various different

companies so let's consider commodity

pricing for a moment commodities

they're trending down but they're not

trending down as fast as we'd like so

yes there is a potential risk for

margins at Tesla that would be a

reduction of pricing power look at the

Bloomberg commodities index for example

you could see the covid dip this is a

five-year chart you could see the Cova

dip there in March of about 2020 but if

you look at the Bloomberg commodities

index well it has fallen substantially

from a level of about 135 to about 107

right now that is a decline of about

20.8 percent it's still substantially

higher than where we saw the Bloomberg

commodity index in the year of 2021.

notice how in 2021 the Bloomberg

commodity index sat between 85 and about

100. now we're sitting at 107. so we're

still about 7 to 15 percent more

expensive than where we sat in 2021

however

wait a second if the prices of Tesla

vehicles like the model y just fell to

about 37 8 from 42 in their second price

cut in China we've got price cuts of

somewhere between 10 to 15 percent for

vehicles in China

well the Commodities index is down from

its peak at the beginning of 2022 where

Tesla was actually raising prices for

vehicles in China by over 20 percent so

even though it's not plummeting it's

actually falling faster that is

commodity prices are falling faster than

Tesla's sales prices are falling so that

actually does create some hopium that

maybe margins could be maintained but

there is a risk and that's a risk that

Tesla actually has to kind of shoot

ahead of the Running Deer that is Tesla

you think about it signs up for

contracts for Commodities and so that

could create a lag for when they might

actually realize the margin benefits of

falling commodity prices what if Tesla

is locked in some higher prices for

longer and it takes longer to actually

see that margin Improvement well in that

case yes you would expect to see Tesla

margins hit then it just becomes a

question of how bad does it get compared

to the other companies but a demand

concern here in my opinion isn't really

the big concern because again you want

to be looking at companies that have the

levers to adjust pricing while still

maintaining profitability that's

important compare the valuation now

because we've looked at the

profitability of byd compare the

valuation of byd to Tesla byd in their

earnings uh ending their six-month

earnings uh per share ending in June of

2022 they only had 4.1 cents of eps

now their forward estimate is better

they're expected to sit at about a buck

10 for earnings per share in 2023. well

at a buck 10 for EPS in 2023 you're

looking at a company with about a p e

ratio of 50. EPS might be growing from

these small numbers by about 50 percent

kind of like Tesla year over year that

would put the byd PEG ratio at about one

now Tesla has an EPS forecast of about

5.1 for the same period that puts them

at a p ratio of about 20. and if Tesla's

EPS growth rate instead of being 50 is

just 40

Tesla's valuation is half as expensive

as byds on a PEG ratio basis

said another way Tesla's half as

expensive as byd or in another way again

byd is twice as expensive as Tesla right

now with margins of 1.4 percent net

so you're invest if you're investing in

byd because that's a stock that's gone

up whereas Tesla is a stock that's gone

down you're paying twice as much money

for growth at byd and you're investing

in a company that actually doesn't have

a lot of room to cut prices because

again they're only bringing 1.4 percent

to the bottom line versus Tesla's 13

and when you consider the fact that

Tesla has the you know margin of safety

potentially of insurance and FSD which

isn't even really being considered in

these numbers yet it is to some degree

but not as much you potentially have a

company that sets itself up for an

explosive stock performance once Wall

Street gets over this idea of demand

concerns and of course a downward Trend

because don't get me wrong Tesla has

been the easiest stock to short Tesla is

a stock that has essentially been

straight down since November of two

thousand 11 all you have to do is short

Tesla and you make money in this market

the trend is down for Tesla that's very

clear you have to be insane to think the

trend is not down you make the most

money shorting Tesla right now and

that's okay that doesn't change the

fundamentals though and the fundamentals

are that Tesla is substantially more

profitable than byd it sells for half

the valuation of byd and it's likely to

grow at a substantially higher Pace

relative to its competition even in a

recessionary environment

however don't get me wrong recessions

are hard and all you have to do is look

at a company like Winnebago to see that

when you get into environments like this

you are expecting deflationary fights

look at page 13 of the earnings call for

Winnebago and they right here you could

pause on this and you can read it and

you can see how they're implying a

deflationary flight coming or fight

coming that same thing in my opinion is

likely to happen in auto manufacturers

however the real test of which company

has pricing power will be which company

can reduce prices and maintain massive

profitability above the competition

here's why imagine byd Ford GM all have

to cut their prices and Volkswagen all

have to cut their electric vehicle

prices to compete with Tesla price Cuts

now those companies potentially go into

Nega negative cash flow and negative

earnings because they've cut prices just

to sell their inventory and now they're

in a negative earnings position

Tesla might have lower margin but they

might still be in a situation of

substantial profitability that then

leads the competition to produce less

electric vehicles because every electric

vehicle they produce Burns money for

them that enables Tesla to actually eat

more market share while the competition

shrinks

so

from a fundamental point of view what's

happening at Tesla is totally normal

Justified and expected from a trend

point of view Tesla's going to zero

I hope this helps you with some insight

look at the valuations and profit

margins at these companies pay attention

to them it is critically important thank

you so much for watching if you like my

content please consider sharing the

video and subscribing and we'll see you

in the next video goodbye