EV fundamentals clash with high pricing and likely lowered demand.
Timing the market is of critical importance when it comes to stock investing. It is often the difference between a loss and double-digit gains over a certain time period. The drawback is that timing the market could lead to missing out on gains and habituating emotional trading.
With this in mind, Tesla’s stock has broken even over one year. While the S&P 500 index rose 24%, TSLA shares are down 0.32%. Year-to-date, TSLA is down 20%. In market cap terms, this means that Tesla (NASDAQ:TSLA) lost $162 billion of value, roughly half that of Toyota (NYSE: NYSE:TM).
Alongside Ford Motor (NYSE:F), Tesla was one of the most shorted stocks in 2023.
Given these lackluster returns and market sentiment, can Tesla still be considered a growth stock, or does it have room to rally in the second half of 2024 with the expected interest rate cuts?
Reasons for Tesla’s Poor Performance in 2024
In Tesla’s Q4 2023 earnings, the company reported a 23% downturn in year-over-year gross profits, at $25.1 billion. Total EV revenue at $21.5 billion barely entered the positive zone of 1% growth for the quarter.
Most tellingly, Tesla’s operating margin decreased by 784 basis points for the quarter at 8.2%, indicating a significant reduction in cost-effectiveness and supply chain issues. For comparison, Tesla’s operating margin was 16% in Q4 2022.
Regarding earnings per share (EPS) for the full year (diluted GAAP), TSLA stock tracked 19% growth from $3.62 in 2022 to $4.07 in 2023. In short, Tesla missed both key quarterly earnings estimates, EPS of $0.71 vs expected $0.73 and revenue of $25.167 billion vs expected $25.640 billion.
Tesla’s Economies of Scale Problem
Focusing on performant electric vehicles was one of the initial drivers of Tesla’s success. However, that came at the cost of offering the luxury EV category as a base model. The company’s cheapest model is Model 3, which has a $40,380 price tag as of January. This represents a substantial adoption hurdle.
S&P Global Mobility Survey found that 48% of respondents view EV prices as too high for comfort, with 62% waiting for the technology to improve before considering EV purchases. For that to change, the battery cost has to come down, in addition to manufacturing automation.
Elon Musk pushed mold vehicle chassis to streamline this process, manifesting in Tesla’s latest offering – Cybertruck. Likewise, Tesla aims to become self-sufficient in mass-producing new batteries. Yet, both Musk and experts believe scaling batteries will be a difficult long-term proposal given the fluctuating supply of rare earth minerals.
“It’s really, really difficult to manufacture at a speed and at scale.”
Shirley Meng, University of Chicago, previously working with Tesla-acquired Maxwell battery company.
In the meantime, Tesla continues to rely on Panasonic and LG Energy Solution, as well as Chinese Ganfeng Lithium and Contemporary Amperex Technology Limited (CATL). According to Nikkei analysis, as much as 39% of battery materials for Tesla EVs come from China.
Regarding chokepoint reliance, Tesla received the highest rating of 10, per Fronteo’s chokepoint score index. This is not favorable amid contentious US-China relations. Likewise, it gives the USG leverage over the company following Elon Musk’s Twitter acquisition.
Tesla’s Green Credit Boost, Competition and Recession
China and the US heavily boosted EV adoption with the so-called green credits. Included in the Inflation Reduction Act, Tesla lost up to $7,500 in green credits for its Model 3 RWD and LR, reduced to $3.750 since January 1, 2024.
This comes from USG’s intent to prevent battery sourcing from countries like China. At the same time, Tesla was forced to cut prices multiple times to compete in the Chinese market against BYD, Li Auto (NASDAQ:LI), NIO, and Xpeng (NYSE:XPEV) Motors.
Tesla produced 1,845,985 cars in 2023 compared to 1,369,611 in 2022, representing a 35% year-over-year production growth. Given that the New York Fed forecasts a 61.47% recession probability by January 2025, compared to a long-term average of 14.60%, Tesla’s car sales are likely to be negatively impacted.
Tesla’s Long Term Prospect
It bears noting that Tesla reported a record-high free cash flow of $2 billion in Q4 ‘23, a 45% year-over-year increase. Companies typically stack strong free cash flow ahead of economic contractions (recessions) to power through.
So far, Tesla’s revenue CAGR for five years is 35.2%, under the 50% that Elon Musk forecasted in early 2021. Equally so, in January 2022, Musk said that he expects growth to be “comfortably above 50%” in 2022. If a recession unfolds this year, the company could fail to deliver this goal for the third consecutive year.
However, given Tesla’s dominant EV market position in the US, the long prospect of scaling production and batteries remains in Elon Musk’s favor. Based on 32 analyst inputs pulled by Nasdaq, TSLA stock is a “buy” 12 months ahead. The average TSLA price target is $218.75 vs the current $194.77. The high estimate is $345, while the lowest forecast is $23.53 per share.
Disclaimer: The author does not hold or have a position in any securities discussed in the article. Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
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