With all the noise and controversies surrounding Tesla and its founder Elon Musk, is TSLA 📈 a good stock to buy after having dropped by 39% from its highs less than a year ago? Back in July 2023, Tesla’s share price reached $292, valuing the company at over $1T. At the time, Tesla was more valuable than the rest of the world’s major auto manufacturers combined.
What drove the massive drop in its share price?
It’s hard to single out a specific factor among the myriad of issues going on at Tesla. For starters, the company’s valuation was completely off the charts during 2022 and 2023. At one point, the company’s price to sales ratio exceeded 20x. That’s about twice the level at which Google, Meta or Microsoft trade today.
Competition from China in electric vehicle sales has stiffened massively over the last couple of years. Players like BYD are undercutting Tesla’s prices in one of its most important markets.
Many Wallstreet analysts have issued downgrades citing downside risks to first-quarter 2024 deliveries and earnings. Wells Fargo’s analyst even called Tesla a “growth company with no growth,” voicing concerns over flat or declining future volumes.
Elon Musk’s distractions and controversies
Tesla’s CEO, Elon Musk, is going from controversy from controversy. The list is too long for this post. What stands out are his multiple positions from which he is calling the shots at Tesla, SpaceX or social media platform X, not to mention his various other ventures, such as at Neuralink, XAI and The Boring Company.
Musk just recently made the news for diverting Nvidia AI chips worth $500m from Tesla to X. Adding insult to injury, as The Economist reported this week, Elon Musk has recruited several dozen of Tesla’s top engineers at X and XAI.
These moves have raised concerns among Tesla shareholders about Musk’s priorities and commitment to Tesla’s development of its AI capabilities.
Elon Musk has also been in the crosshairs due to his record setting $55B compensation plan, equivalent to around 10% of TSLA’s market capitalization. Critics argue that the package reflects undue influence due to Musk’s close ties with board members. A Delaware judge blocked the package, raising concerns about the negotiation process and whether it truly serves shareholders’ best interests.
In response to the judgement, Elon Musk has initiated a move of Tesla’s state of incorporation from Delaware to Texas.
Stalling production and recalls
Production is no longer growing at the breakneck pace seen between 2021 and 2023 when Tesla grew its production from 936,000 vehicles to 1.85 million vehicles. In 2024, production may actually fail to grow year on year. The projected figure of 2 million vehicles will be hard to reach given major production issues at some of Tesla’s sites, such as in Berlin, Germany.
In December 2023, Tesla announced its largest-ever-recall covering 2.03 million vehicles – or nearly all of its vehicles on US roads. The recall covers models Y, X, S, 3 and Cybertruck vehicles in the U.S. equipped with Autopilot produced between the 2012 and 2024 model years.
Falling demand and sales
Tesla has faced declining demand for its electric vehicles, both in the U.S. and internationally. Sales have been particularly challenging in China, Tesla’s second biggest market, where competition from local manufacturers like BYD, NIO and Xpeng has intensified. In Q1 of 2024, Tesla’s deliveries were actually down nearly 9% year on year.
Overall market demand for electric vehicles has slowed due to continued high vehicle prices and a limited number of lower cost options.
Slowdown in revenue growth
In light of these falling deliveries and slowing demand growth, Tesla’s revenue projections for this and next year have been cut significantly. For the year 2024, analysts project no more than 2% revenue growth. The revenue growth projection for 2025 at 15% is also not a particularly exciting given the company’s ambition to become the long-term leader in the market for electric vehicles.
Tesla’s revenue is further hampered by significant price cuts throughout 2023 and into 2024 to stimulate demand and maintain market share in the electric vehicle (EV) market. These reductions have been substantial, with prices for some models cut by tens of thousands of dollars compared to the previous year. In some markets, the Model S and Model X experienced price cuts of 15-19%.
Margin erosion
In 2024, driven by price cuts, Tesla’s margins are taking a major hit. The company’s EBITDA margin is projected to fall further after declining from 21% in 2022 to 14% in 2023. The company’s net margin, which had held up in 2023, is projected to drop from 15% in 2023 to just 8.9% in 2024. It’s no longer that far from GM’s 📈 6.3%. By approaching typical car manufacturers’ margins, Tesla risks being seen as just that, another car manufacturer. This would have disastrous consequences on its valuation, as we explain later in this post.
Falling profitability
Tesla has disrupted car manufacturing in several ways. It brought electric vehicles to the forefront, cut out the middleman by selling directly to consumers and ingeniously introduced over-the-air software updates.
The company also chalked up profitability levels that were previously unheard of in car manufacturing. In 2022, Tesla reached a return on assets of 17.4% and net profit margin of 15.5%. By comparison, in the same year, GM 📈 reported return on assets of 3.8% and net profit margin of 6.2%. Ford 📈 even lost money that year.
In 2024, Tesla’s return of assets is projected at 8%, only half of the level of profitability reached in 2024. Whether the company achieves the slight rebound in return on assets projected at 10% in 2025 is highly questionable.
Notwithstanding the massive drop in profitability, Tesla remains the most profitable company in the automotive space. Elon Musk’s has gone to great lengths to put Tesla into a peer group other than automotive. A huge gap in profitability relative to carmakers was one of the factors he’s been putting forward to back up his argument that Tesla should be regarded as a software firm rather than a mass volume carmaker. This profitability gap is closing fast.
Tesla stock valuation
The industry into which the market places Tesla has an immense bearing on Tesla’s valuation. We believe there’s a considerable chance that Tesla ends up as just another car maker in the market’s eyes.
It already churns out over 2 million cars (and trucks) a year. And over the past 12 months Tesla has foregone a considerable share of the pricing premium it originally built into its cars’ price tags, as competition in the EV market intensifies. Tesla is now officially participating in the car industry’s notorious discount race.
Being considered a car manufacturer would be disastrous for Tesla. The company currently commands a valuation premium of 10-15x versus the world’s leading car manufacturers. On a Price to Sales valuation, Tesla currently stands at 6x. This compares to 0.3x for GM and Ford. Honda reaches 0.6x.
If Tesla’s multiple was to come down to 2x – still a lot higher than GM or Ford – it would mean that it’s stock price had to drop by 66% from today’s level. Tesla’s share price would decline from $177 to $58.
In conclusion, is Tesla a good stock to buy?
We believe there is a strong likelihood that Tesla’s stock is still very much overvalued. Our assessment of the question is Tesla a good stock to buy is clear. We would stay clear.
The likelihood of Tesla becoming “just another” car manufacturer is high. It may still benefit from an advantage in software solutions for electronic cars and autonomous driving. But many players are catching up fast. Unfortunately for Tesla, catching up on software is much quicker than catching up on new industrial processes. Peers are catching up much faster on software than they did on building electric vehicles. As analysts increasingly view Tesla in comparison to GM, Ford and other car manufacturers, the valuation premium can be expected to drop. And it has some ways to go.
Uncertainty is never a good thing for a stock or company. Yet, in Tesla’s case there’s uncertainty abound. If Musk’s pay package goes through, massive dilution awaits. At the current stock market valuation, the pay package makes up around 10% of Tesla’s market capitalization.
Finally, running multiple high-tech, high stakes business, Elon Musk’s focus on Tesla is very questionable. Several of his other business, such as SpaceX, are doing very well. This discrepancy could draw even more of Musk’s attention to SpaceX, X, XAI or Neuralink, leaving Tesla without much-needed strategic guidance.
Important notice:
This article is not to be understood as a recommendation to buy or sell. Please conduct your own research before making investment decisions. To this end, we aim to provide you with the best portfolio management tool and investment research data possible. However, we cannot guarantee the accuracy of this information in spite of our extensive efforts to ensure that the data is complete and 100% accurate.
