Can Tesla Stock Bounce Back?

Tesla (NASDAQ:TSLA) hasn’t fared well of late with its share price down 6% for the year, and lagging the S&P 500, which is up 16% year-to-date.

But it’s not all gloom and doom. If we zoom out over a 5-year period, Tesla share price is up 1,388% versus the S&P 500 which is up by just 88%.

So, in spite of the underperformance this year, Tesla has clearly been on a good trajectory in recent years and is doing a lot right. In fact, there are opportunities on the horizon that may very well propel Tesla back to market-beating performance.

What’s Going on with Tesla at the Moment?

When you zoom out on Tesla, the numbers can’t help but impress. Narrowing the view to the short-term, however, offers a gloomier perspective. Last quarter’s deliveries disappointed investors and customers alike. In Q1 2024, deliveries were 386,810—down 8.5% year-over-year and 20.2% from Q4 2023.

In addition, the company produced 433,371 vehicles in Q1 2024, which far exceeded deliveries, pointing to lower demand than anticipated.

Tesla blames this shortfall on the buzz surrounding its updated Model 3 at the Fremont factory and necessary factory closings spurred by conflicts in the Red Sea diverting shipments. The arson at the Berlin Gigafactory also shut down production for a while.

Although Tesla is still the largest EV maker in the United States, competition has been eroding its market share lately. While Tesla has sold more EVs in the U.S. than all the other automakers combined for six years, that streak might be coming to an end.

According to J.D. Power study, Tesla is losing its lead among other automakers when it comes to quality. Customers aren’t happy that the company removed some of its traditional features.

And then there are the promises made by Musk regarding the timeline and rollout of Full Self Driving, or FSD. For years, it seems, FSD has been on the cusp of rolling out but failed to do so fully. That has many believing that Musk’s new claims are somewhat hollow. These extend beyond FSD to Optimus, which he claimed would be a monstrous cash flow generator for the firm.

How Has This Affected Tesla’s Financials?

Tesla’s Q1 results generally disappointed with a 9% decline from the prior year to $21.30 billion while automotive revenue fell 13%. The bottom line was down by 48% year-over-year.

Negative free cash flow of $2.50 billion stemming from a $2.70 billion inventory increase and $1 billion in AI infrastructure capital expenditure resulted in cash burn of $2.20 billion that had investors worried also.

It can’t be overstated that the turnaround in growth has been dramatic in Tesla’s top line. During the 2020 and 2021 period, it was hard to find a quarter with year-over-year growth under 37.2%. Fast forward to the past four quarters and the peak growth rate was 8.8%. In Q2 the company returned to modest growth of just 2.3%.

Earnings before interest and taxes were reported at $2.1 billion for the quarter and cash levels boosted back up to $14.6 billion with $16 billion in short-term investments.

Can Tesla Stock Bounce Back?

Tesla stock can bounce back if it can re-ignite revenue growth and slow the cash burn. In order to do so, demand will need to return in order to match the production volumes from worldwide Gigafactories. 

On the product side, Tesla’s advancements in battery design and manufacturing, including its 4680 battery cells, are likely to improve vehicle range, reduce costs, and enhance overall performance. Given that battery longevity is a major concern for prospective buyers, this offers the opportunity to win over new customers.

So too Tesla has the chance to diversify revenue streams so that it’s not solely dependent on vehicle sales. As a major player in the energy sector, with products like solar panels and energy storage solutions, growth in these segments offers the potential to reignite revenues and reduce dependence on car sales.

As the company expands its product lines, it can also take advantage of its brand strength and customer loyalty, both of which are significant assets.

There is also an aspirational aspect to Tesla whereby as it grows internationally new customers seize the chance to become new buyers, particularly in China and Europe. The Chinese market, in particular, is crucial for Tesla’s growth strategy but BYD is offering stiff competition there.

If it can execute well, some of the issues seen so far may be muted. For example, Tesla cited lower vehicle average selling prices as one of the reasons for the less-than-desirable miss. 

The auto manufacturer is also reportedly planning to start production of a new mass market electric vehicle, codenamed “Redwood”, in mid 2025. The plan is to start production of its next-gen vehicles at its Texas factory next year. The expectations are for a $25,000 mass market car to be released.

What Should You Do with Tesla Stock Now?

With new, more affordable models on the horizon, the prospects for FSD rolling out at scale, autonomous taxis in the future, and Optimus, the robot everybody will need or want, Tesla has multiple growth levers that it can point to for optionality.

By no means is the recent pullback a sign that the best days of Tesla are behind it. Nonetheless, the slowdown in the top line over the past 4 quarters offers pause and real concern that, absent some of those optionalities coming to fruition, the odds of Tesla taking off like a rocket ship near-term are limited.

More likely, the good news will come over the medium-term and if Tesla can deliver on the expectations of Cathie Wood and others, the share price will once again resume a sharp upward trend. For now, though, the market is waiting for the predictions to give way to renewed revenue growth.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.