Tesla (NASDAQ: TSLA) had a banner year in 2023, doubling its stock value amidst the artificial intelligence (AI) stock frenzy. However, the electric vehicle giant has been stumbling in 2024, with shares plunging 15% due to a series of negative developments. These include price reductions in key markets, Hertz’s shift away from embracing EVs, and CEO Elon Musk’s controversial voting power demands and threats to diversify production.
Despite its remarkable stock surge, Tesla’s financial performance failed to match the same level of success. The company experienced a slowdown in revenue growth, which stood at a modest 9% in the third quarter, with automotive sales growing by a mere 5%. Additionally, profits took a hit, plummeting nearly 50% from $3.33 billion in the third quarter of 2022 to $1.88 billion in the third quarter of 2023.
During the recent earnings call, Musk expressed concerns over elevated interest rates, production challenges related to the new Cybertruck, and slow factory production in Mexico. Moreover, Tesla is set to lose certain EV tax credits in the U.S., further exacerbating its woes. With the company having already slashed prices twice this year and no immediate relief in sight for interest rates, prospects for profit growth seem bleak. The average Wall Street analyst projects a modest 19% profit increase, in line with the anticipated 20% revenue growth.
Amidst these challenges, the looming question is whether Tesla can stage a successful recovery and regain its footing in the market.
Image source: Tesla.
Can Tesla’s Cost Reductions Outpace Price Cuts?
Some proponents of Tesla, such as Ark Invest’s Cathie Wood, view the company’s price reductions as a strategic move to gain market share and outpace rivals unable to compete at lower price points. However, these price cuts, roughly at 10%, have a direct impact on Tesla’s already shrinking automotive gross margins, which stood at 18.7% in the third quarter.
Tesla’s production cost per vehicle over the past year shows a declining trend, providing a glimmer of hope in terms of cost management. However, the upcoming launch of the Cybertruck is expected to exert upward pressure on production costs. Additionally, the continuation of price reductions implies a further decline in the average sale price per vehicle.
While Tesla’s ability to rein in costs could potentially lead to profit growth, it faces formidable challenges from international rivals like Hyundai and BYD, prolonged high interest rates, and a broader softening of demand in the electric vehicle industry.
Investor Outlook
Tesla investors eagerly await the fourth-quarter earnings report, which is likely to shed light on the company’s strategies and outlook for the future. However, the stock may face downward pressure unless a new catalyst, such as full self-driving capability, emerges. With Tesla’s stock trading at a premium and its financial standing not fully justifying its valuation, the road ahead looks challenging. The company’s resilience in the face of mounting obstacles remains to be seen.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BYD and Tesla. The Motley Fool has a disclosure policy.
