Tesla faces weak demand and increased competition in the electric vehicle market.
tesla (TSLA 3.91%) is one of the world’s largest electric vehicle (EV) makers, but its stock is down 39% from its all-time high in 2021, and continues to underperform the S&P 500 this year.
Tesla faces several challenges related to EV demand, competition, and rapidly slowing sales growth. In fact, the company’s annual EV shipments may shrink in 2024 for the first time since it began producing its flagship Model S in 2011.
Tesla stock still looks very expensive despite its decline since 2021. Here’s why the annual decline in EV sales could trigger further declines.
Tesla is having a tough year
Tesla’s total EV shipments fell 6.5% year-over-year in the first half of 2024, and the company just recently announced third-quarter deliveries, which fell short of Wall Street expectations. These results look even worse considering that Tesla has lowered prices over the past year to stimulate demand.
Price cuts have steadily reduced Tesla’s gross profit margin, which is now half its peak three years ago. In other words, lower prices failed to promote the company’s sales growth and significantly reduced the company’s profitability.
But these challenges are not unique to Tesla. In Europe, overall EV sales fell by 44% in August, with market share dropping to just 14% from 21% in the same month last year. Additionally, automakers such as General Motors and Ford Motor Co. have cut billions of dollars in planned investments in the EV segment, citing weak demand.
Tough economic conditions, hit by high interest rates, could prompt consumers to switch to cheaper gas-powered cars instead.
But competition is another big headwind for Tesla. Manufacturers in countries with low production costs, such as China-based BYD, are mass producing EVs at price points that Tesla just can’t match. For example, the BYD Seagull sells for less than $10,000 in China and could arrive in Europe in 2025.
Tesla is feeling the pressure because it has a large presence in both China and Europe. That’s why the company plans to launch its own low-cost electric vehicle next year that will cost just $25,000. It probably won’t be enough to replace Seagull, but it may attract lower-income consumers looking for a more premium product.
Tesla’s deliveries are at risk of declining year by year
Tesla began producing its flagship Model S in 2011 and delivered 2,600 units to customers in 2012. Deliveries are increasing year over year thanks to the company’s expanding fleet of vehicles, which now includes the Model 3, Model Y, Model X, and Cybertruck. A year has passed since then.
In 2023, Tesla delivered a record 1,808,581 cars, an increase of 38% from 2022. While this was a strong result, the growth rate was significantly lower than CEO Elon Musk’s goal of 50% annual growth.
Additionally, due to the recent challenges highlighted earlier, Musk did not provide a forecast for 2024, leading some analysts to expect deliveries to be around 2.2 million units. This means growth will be just 22% compared to 2023, which would be even lower than Musk’s 50% goal, but there is a bigger problem.
Tesla delivered just 1,293,656 cars in the first three quarters of this year. That means it would need to deliver a record 514,925 cars in the final quarter of this year to beat last year’s numbers. If it fails to do so, deliveries will decline on an annual basis for the first time since the Model S was launched.
Image source: Tesla.
Tesla stock looks very expensive right now
Tesla has a price-to-earnings ratio of 70x, based on its trailing 12-month earnings per share (EPS) of $3.56 and the stock price of $249.27 as of this writing. This is more than double. The Nasdaq 100 Technology Index has a P/E ratio of 32.1 and is representative of Tesla’s leading technology companies.
Tesla stock is also more expensive than Nvidia, which has a P/E ratio of 55.7. There’s a big problem here. Nvidia is on track to increase its EPS by a whopping 138% this fiscal year, while Tesla’s EPS is expected to contract in calendar 2024. From that perspective, it makes no sense for Tesla stock to command such a high price. It’s a premium for other technology sectors.
Many investors outside the EV industry own Tesla stock for its future potential. The company is a leading developer of self-driving software, humanoid robots, and solar power and battery storage. These segments could become extremely valuable in the future, but Tesla’s EV sales currently account for 78% of total revenue, leaving investors ignoring what’s happening in its core business. I can’t.
For Tesla stock to match its P/E ratio with the Nasdaq 100, it would need to fall 54% from its current price. This means investors who buy Tesla stock at current prices could be exposed to a significant correction if sentiment worsens. in the negative direction. A decline in annual EV deliveries could be the trigger, especially if analysts do not expect growth in 2025.
