KeyStone’s Stock Talk Show Episode 248.
Tesla Prediction Update
During our 2024 predictions show back in January, I predicted that “On an Absolute Basis, Tesla (TSLA:NASDAQ) will decline during 2024, from its current price of $256.50.” And this was based on:
- Tesla’s profit margins declining as the company was reducing the price points of its vehicles.
- High interest rates are impacting EV demand with expectations for 2024 to be modest.
- And finally, we are seeing significant competition coming in. From Porsche, Mercedes, etc,
Slide 2
So right now, my prediction is “in the money”, with the stock down -32% to $173, and let’s go over a few reasons why the stock is down:
Slide 3
The company reported its Q4 financial results on January 24th, 2024, which was just a few weeks after we did our 2024 predictions show.
And looking at the results, revenue growth for the year continued to be strong, up 19%, but it did slow considerably from the 51% growth achieved in 2022. And at a first glance the company’s profitability appears to be robust, up 19% to $15 billion…. but if we look a little further there was actually a $5 billion benefit from income taxes for the year.. so if we adjust that tax benefit out net income is actually closer to $10.0 billion, and basic EPS is approximately $3.15. Which is a decline of 20% from 2022.
So after making the adjustment to 2023, net income margin was closer to 10.3%, for 2022 it was 15.4%, and for 2021 it was 10.3%.
SLIDE 4
And one of the partial reasons for the decline in margins is due to the decrease in prices of its models, with the Model 3 base down about 17.5% from 2023, the Model S Base down 27% in price and the model x down around 34%.
And while Elon decreased the prices of its models to try to maintain the growth in deliveries…..
Slide 5
Last week Tesla reported a Q1 deliveries miss of 386,810 vehicles, which compares to analyst estimates in Q1 2024 of approximately 449,000 deliveries.
Slide 6
So now that I am taking my slight victory lap with the stock down 30% from when I made my prediction, we all know that because I am bringing it up on the podcast the stock is probably going to go up to $300 by the end of the year… making my prediction wrong…
But in all seriousness, I think 2024 will continue to be a difficult year for the business, especially with elevated interest rates and consumers more hesitant to go out and finance a new vehicle.
How Much Cash Should You Allocate?
1)
We received a question about how much cash you should hold.
“Cash In a climate of reduced purchasing power and increasing money supply, how much cash as a percentage of a total portfolio should one keep? Rebalance once a year? A person’s age a consideration? “
We can break this question down into a few factors, percentage of cash, rebalancing frequency and age which I’ll add other considerations into that as well. All these factors interact with one another and may change depending on market conditions.
2)
First a few considerations,
Age is a big one as highlighted, as this generally dictates the investment stage of a person. When you are initially beginning to invest in your 20’s you have a longer time horizon and are accumulating wealth during this period so an emphasis on growth. Whereas in retirement you are actively drawing down from your built wealth relying on it for your income. It really comes down to foreseeable or planned and unforeseeable or unplanned expenses, which age generally gives an idea of what you can expect.
3)
Foreseeable expenses include big expenses such as buying a house a car, kids’ university tuition, and effectively any sizeable planned expense. If you have a larger expense the more cash you will want to have held. Further, the closer you expect to need to use the cash the higher amount of the value you need should be in cash. So, if you expect to buy a house within a month is very different than a house 10 years from now. 10 years from now shouldn’t have any proportion of the value assigned to cash whereas a month should effectively be 100%.
4)
Unforeseeable expenses are things like medical expenses, non-maintenance household repairs, loss of employment income, natural disasters and so on effectively anything that could occur but you don’t know if they will and if they do how much it will cost. These are the types of events that people need an emergency fund for.
Even in the case where you have insurance that would cover the event, you may need the funds sooner than what will be paid out. Obviously, this depends on the type of event and insurance but you should be mindful of it and not inherently depend on insurance for short-term expenses.
Therefore the need for cash to be set aside. Generally, you’ll want 6 months to a year in expenses to be set aside in cash. You’ll need to budget and check your actual historical expenses to get this figure.
By adding the foreseeable planned expenses and unplanned expenses with respect to the size of your portfolio, you can get a ballpark figure percentage on how much should be in cash. It will likely be in the range of 2-20% of your total financial wealth. Don’t pin yourself to a percentage target as your portfolio value will change over time and your expenses likely will as well. It may be easier to think of the cash in absolute dollar terms over a percent of your portfolio. Also, you should look at a range instead of a pinpointed value, as a pinpointed value will never be exactly correct. Think a minimum of 6 months expense to a max of 12.
5)
I will caution here, that holding too much cash is a risk. Holding too much cash is a risk because it will on average grow at a lower rate than other investments, particularly stocks. So, if you hold too much cash you may put your retirement plans at risk if you do not allocate enough to growth during your wealth building years. You need to balance the short-term expense risks with the long-term risks of not meeting your goals, so don’t over-index into cash because you believe it is less risky as risks come in various forms.
6)
Another type of cash you may need to consider is transitory cash, cash which you have from selling off an investment for whatever reason that may be. You generally want to minimize this as it creates a cash drag on average as cash is a lower average return than other investments.
But, when you sell off an asset it can be a good time to reevaluate and potentially rebalance your cash percentage and does it covers what you should have. If you are way above your cash target reinvest the money as soon as you can, if you’re in the range you desire don’t reinvest and hold in cash.
As long as you don’t have a shift in an upcoming planned expense or unplanned expense the cash balance should only be increasing in dollar terms in isolation. So you will only need to add to the cash balance if an event occurs or will shortly, you shouldn’t need to constantly top up cash.
If you do need to withdraw cash for an expense if you are not able to quickly top it up through normal income you will want to sell investments to re-top it up.
7)
Perhaps one of the things many people overlook is how you hold cash. When I say hold cash it should primarily be in cash equivalents or cash-like investments. Having your cash allocation in purely cash will generate no or little interest. Cash investments will return near the short-term interest rate. At the time of recording, you’ll be looking at 4.5% to 5% return. Some types of assets you’ll be looking at are cash ETFs, investment savings accounts, and treasury bills. We have a report from September 2023 which goes through these. You’ll get the report for free on sign-up on our website. As well, the report is going to be updated sometime in the next few months.
