Tesla Inc.'s surprisingly low quarterly sales numbers this week are raising a fundamental question for investors: If the days of breakneck growth are over, how much are shares of Elon Musk's company really worth?
The concerns are valid. The number of cars Tesla sold in the first quarter missed Wall Street's expectations by such a wide margin that it's worth asking to what extent the EV giant's demand problem is due to elevated market expectations. growth of its revenues and profits in the coming years.
"There's not a lot of visibility on where Tesla's next stage of growth will be, whether it's electric vehicles or its other projects," said Nicholas Colas, co-founder of DataTrek Research. “If you're going to get a premium multiple, you're going to have to have great earnings visibility or a fantastic story about why those earnings will appear in the future. “Tesla has neither at the moment.”
The growth issue around Tesla has become so sensitive that a report on Friday that said the company was ditching its plans for low-cost electric vehicles, which were seen as key to solving its demand problem, caused concerns. shares fell more than 6%.
Musk was quick to refute the story in a post on his social media site,
“Tesla needs a $25,000 compact vehicle as a complementary product to compete with the many $25,000 electric vehicles being launched,” said Gary Black, co-founder of Future Fund Advisors. "Going for a robotaxi vehicle at this time would be incredibly risky."
All of which helps explain why Tesla stock has struggled so much this year. Its 34% drop makes it by far the biggest drag on the Nasdaq 100 Index since early January, and the worst performer on the S Index
"We warn that Tesla shares could fall much further if the company fails to quickly restore unit volume and revenue growth," JPMorgan analyst Ryan Brinkman wrote in a note to clients Wednesday, noting the risk. for Tesla's market capitalization if it is no longer perceived as a hypergrowth company.
Tesla sold about 387,000 cars in the first quarter, while analysts thought that figure would be around 449,000 on average. Obviously, earnings estimates for the quarter will now have to be cut, having already fallen by more than half in a year. It also puts the company on track for a second straight year of declining annual earnings. In fact, analysts on average now expect it will take until 2026 for Tesla to surpass the level of profitability it recorded in 2022.
However, that doesn't mean the stock is cheap. At 59 times forward earnings, Tesla is the most expensive member of the Magnificent 7 group of big tech companies. Blue-chip Nvidia Corp. trades at a multiple of around 36, and Amazon.com Inc. is at 45. However, Tesla has the lowest growth estimates of the three for this year. And its shares are the ones that have fallen the most in the Bloomberg Magnificent 7 Price Return index in 2024.
Brinkman believes there's a good chance Tesla's revenue will fall materially in the first quarter, "probably causing even the most optimistic investors to revise their sentiment." Analysts on average expect a slight drop of around 0.6%, according to data compiled by Bloomberg.
Despite Wall Street's apparent surprise at Tesla's problems, no one should complain that they were not warned. Tesla first noticed the weakening pace of demand in October last year. But the reaction shows how few people fully grasped the speed of the slowdown.
“Analysts knew that electric vehicle growth was slowing, but there was a lack of understanding on Wall Street last quarter to what extent it would impact sales,” Adam Sarhan, founder and CEO of 50 Park Investments, said in an interview.
All that said, Tesla stock could rebound in the near term as dip buyers start snooping around. They closed at $164.90 on Friday after trading as low as $160.51 when news of the low-cost vehicles first hit. Chart technicians, who analyze stock movements to detect such changes in trends, say stocks appear to be finding a bottom in the near term.
In other words, the most intense part of the sell-off may already be over, at least for now. “As long as the stock stays above the $150 to $160 area, technically, it is trying to bottom out,” said 50 Park's Sarhan.
But the company will have to show more for the share price to make a sustained recovery. Investors must be convinced that Tesla can return to its strong growth, wide margins and highly innovative methods. Right now, the story is declining demand and a shaky outlook, which gets to the heart of the company's lofty stock valuation.
"It's challenging to call the bottom at this stage because there's no real catalyst on the horizon," said David Mazza, chief strategy officer at Roundhill Investments. Stopping the bleeding on the stock will require Tesla to pull a “proverbial rabbit out of the hat,” he said.
"It seems like Musk is trying to do just that with his latest X post about the robotaxi," Mazza said. "But unless the company shares specific news on how to shore up the core EV franchise, the impact may be illusory."
