Why Did Tesla’s Stock Jump?

Electric vehicles are synonymous with Tesla, Inc. (NASDAQ:TSLA) in the U.S. The EV industry leader, which has made a name for itself as a sustainable juggernaut in automobiles, found itself in a tough spot this year after a slew of developments, declining about 40% before the most recent earnings were announced.

After Tesla shares declined earlier in the year, a fast turnaround occurred, so what does the future hold?

What’s Going on With Tesla?

Tesla was hit with underwhelming vehicle deliveries in the prior quarter. Until then, the company had managed to top the 400,000 vehicle delivery mark, which it had first achieved in Q4 2022.

Q1 2024 vehicle deliveries came in at 386,810 units, posting a decline of 8.5% compared to the prior year’s quarter and 20.2% from the quarter before.

Another concerning factor is that the company produced significantly more vehicles, a total of 433,371 units, last quarter versus the number it delivered, which suggest that demand for its products is somewhat subdued.

While arguments might be made that the overall EV industry is experiencing a slowdown, Tesla’s industry-leading position likely influences this trend. The headwinds and bearish sentiment combined to result in Tesla’s share of the EV market falling from 61.7% one year earlier to 51.3%.

Tesla Fighting Battles Around The World

Tesla blamed this volume decline on the early-phase production ramping of its updated Model 3 and an abrupt fire at its Berlin-Brandenburg Gigafactory that forced the company to shut down operations for some time. Reports came out that the estimated cost of this was a “high nine-figure amount.”

Competition has ramped up over the past few years in the EV landscape as well. Almost every automaker has made some foray in the electric vehicle space. And China in particular remains a challenging competitive landscape for Tesla.

Management decided to cut prices on some of Model 3 and Model Y cars in the country, provide incentives and then hike some prices. In effect, the company has engaged in a “price war” to stay ahead of Chinese EV companies like BYD Company Limited (OTC:BYDDY).

It’s noteworthy that Charlie Munger, before he passed, described Berkshire Hathaway’s investment in BYD as among the most lucrative ever made. He famously encouraged Warren Buffett to invest in the firm at the very early stages of its manufacturing life.

With deliveries on the decline, Tesla’s China strategy appears to be running into some serious headwinds as BYD competes vigorously on price.

Subdued demand and stock selloff spell cost-cutting for the company, which was exemplified by a 10% cut in its workforce. 

As if the challenges weren’t plentiful enough, controversy surrounding Tesla’s dynamic and sometimes eccentric CEO, Elon Musk’s pay package have given shareholders reason to be anxious too. The company had asked shareholders to restore Musk’s $56 billion pay package after a Delaware judge rejected it. 

A Negative Trend?

The effect of Tesla’s underwhelming demand due to its aging model line-up can be seen in its yearly figures as well.

The company’s top line has shown signs of a slowdown, as its total automotive revenues increased 51.3% from $47.23 billion in 2021 to $71.46 billion in 2022.

In 2023, total automotive revenues came in at $82.42 billion, rising by only 15.3% from the prior year.  

Tesla’s price cuts have taken a tool on margins too. In 2023, the total automotive gross margin stood at 19.4%, compared to 28.5% in 2022 and 29.3% in 2021.

Why Did Tesla Stock Jump?

Tesla’s stock jumped recently following news that advanced driver assistance would be rolled out in China. In spite of the many headwinds the company had been facing, some bright spots sat on the horizon.

For example, Tesla’s Spring update gave exciting news to its customers, promising new UI to Model 3 and Model vehicles laden with AMD chips, an “auto-shift beta” feature to its Model S and Model X, and Audible and Spotify integration, among other new features.

Its much-anticipated Cybertruck was not the beacon of success management had hoped for, though. This month, Tesla had to pause the deliveries of this product, reportedly due to a problem with the accelerator pedal. Many customers reported receiving messages from dealerships telling them of their canceled delivery appointments.

Nonetheless, the long-awaited promise of autonomous vehicles continues to be the pot at the end of the rainbow that Tesla shareholders are clinging to. Musk is going all in on its Robotaxi next-generation model of self-driving cars, postponing ‘Model 2’. Electrek reported that the project was defunded, and the newest line of layoffs consisted of many people associated with it.

Should You Consider Buying Tesla Now?

Tesla stock took quite a beating earlier in the year but the stock has strongly rebounded in recent weeks and it can’t be overlooked that investors who invested five years ago are sitting on returns of more than 750%.

Still, the valuation seems stretched with the company’s forward non-GAAP PEG sitting at 4.07. But Musk has regularly stated that an investment in Tesla is predicated on its ability to use AI to automated the car-driving experience. It’s not simply a play on a car manufacturer per se.

Prior to the recently selloff, Wall Street analysts had been optimistic too with a $181 per share consensus price target but the share price has rapidly risen close to fair value in recent weeks suggesting new buyers should be cautious about jumping in with both feet.

For now, perhaps it’s wiser to keep a close eye on the stock for better entry points. It has a history of volatility so, if history repeats, a dip will occur down the line that may offer a better reward to risk proposition.

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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.