Tesla, the renowned electric vehicle (EV) giant, is currently facing concerns over declining profits, leading analysts to predict a significant drop in its valuation. The company’s shares have already experienced a nearly 50% decline from their peak, resulting in a market capitalization of $660 billion.
Over the past two years, Tesla has struggled to keep up with broader market trends, falling behind significantly. While the stock experienced an astounding 32,000% increase from its IPO in July 2010 to November 2021, recent quarters have presented several challenges for the company.
Factors such as rising interest rates, inflation, supply chain disruptions, a slow macroeconomic environment, and reduced consumer spending have all taken a toll on Tesla’s revenue growth rates and profit margins. As a result, the company reported lower-than-expected figures for the third quarter of 2023, with revenue standing at $23.35 billion and adjusted earnings at $0.66 per share. Analysts had anticipated higher numbers at $24.1 billion in revenue and $0.73 per share in earnings.
Despite a 9% increase in sales compared to the previous year, Tesla experienced a 22% decrease in gross profits and a significant 52% narrowing of operating profit. Elon Musk, the CEO of Tesla, expressed concerns regarding the impact of rising interest rates on the cost of debt, making it more challenging for consumers to afford Tesla vehicles.
Furthermore, Tesla is now facing growing competition from both new players in the EV market and established car manufacturers, which adds to the company’s challenges. Although the production of the Cybertruck is on schedule, with initial deliveries set for November 30th, this segment is expected to remain unprofitable for at least a year following production.
Tesla, once benefiting from a first-mover advantage and economies of scale, has seen its margin advantage diminish over the past year. Despite the increase in sales, several key financial metrics have declined, including a 52% fall in operating income and a 44% decrease in GAAP EPS. Free cash flow has also dropped by 74% in comparison to the same period the previous year, amounting to $848 million.
In contrast, traditional automobile manufacturers like Ford and Mercedes-Benz are facing their own challenges in the EV market. Higher pricing environments have led to a significant decrease in consumer demand for EVs over the past 18 months, with some manufacturers even selling their EVs at a loss to maintain market share.
Analysts are projecting a 26.3% narrowing of Tesla’s adjusted earnings to $3 per share in 2023, resulting in a forward price-to-earnings ratio of 70x. This valuation appears steep for a company that is struggling to consistently post profits. With increasing competition in the EV space and a focus on affordability to counter rising interest rates, Tesla’s ability to rapidly grow its top line is waning. This has led to narrower cash flows and profit margins, prompting analysts to anticipate a significant downward movement in Tesla’s valuation over the next 12 months. There is a potential drawdown of over 40% from current levels, reaching $400 billion if certain cash flow projections materialize.
As Tesla navigates these challenges, it remains to be seen how the company will adapt and regain its foothold in the EV market. The future success of Tesla hinges on its ability to address the aforementioned concerns and overcome the intensifying competition in the industry.
