Will Tesla Stock Rebound?

For years, Tesla (NASDAQ:TSLA) has been high-flying on expectations of massive electric vehicle market growth.

On Friday, January 26th, however, the company lost over $80 billion in value amid concerns over its growth and competitive position.

This selloff triggered a downward trend that has been prominent since the start of the year and has left Tesla investors with steep losses.

What’s Driving Tesla Shares Downward?

The primary catalyst for Tesla’s selloff was its Q4 earnings report. Revenue growth slowed to a crawl, with automotive revenues climbing just 1% year-over-year. At the same time, operating expenses rose 27%, resulting in a -23% effect on gross margin.

Turning to net income, the company’s non-GAAP profits fell by 40% compared to the year-ago quarter. It should be noted, however, that GAAP earnings per share rose 112% in the same period. Even taking this fact into account, Tesla’s GAAP earnings remained quite low at $2.27 per share.

Even factoring in GAAP earnings growth, it’s difficult to justify Tesla’s current valuation. TSLA shares trade at 59.6x forward earnings and 35.6x cash flows. With slower revenue growth potentially settling in, these ratios may be too high for even previously bullish investors.

A final note on Tesla’s troubles is that the company significantly underperformed its delivery targets for 2023. Deliveries were, in fairness, quite positive and boasted a 38% growth rate when compared to 2022. Tesla’s previous growth rate target was 50%, though, giving investors one more reason to be worried about the company’s overall performance in light of its extremely high valuation.

Chinese EV Problem & Other Competitive Challenges

One of the most interesting developments in the EV market in recent years has been the rise of low-cost electric cars produced by Chinese manufacturers. While these companies have already put pressure on the likes of Tesla in China’s domestic market, there is now a serious possibility that they could begin grabbing global market share as well.

Last year, China eclipsed Japan as the world’s largest exporter of vehicles. Shipping 3.8 million autos to foreign markets, the country exploded onto the scene as a major competitor to Japanese, Korean and American companies.

Tesla CEO Elon Musk has even acknowledged the value proposition of Chinese EVs and uncharacteristically called for trade protections to allow non-Chinese brands to remain competitive.

The growing pressure from Chinese firms could be a significant problem for Tesla. Up to now, the company’s competition has consisted of auto majors making gradual transitions to electric technology and much smaller startups like Rivian and Lucid Motors.

Chinese firms like BYD and NIO can operate on scales much closer to Tesla’s while also innovating and adapting quickly.

Although Tesla’s EV market share in the US remains at about 50%, it’s clear that mounting competitive pressures will be a major factor in the company’s performance going forward.

This pressure includes competition from legacy auto majors, which have made slow and steady progress in electrification. While no one auto company can rival Tesla in the EV space, a growing group of rivals could stunt Tesla’s growth.

Tesla’s Under Pressure, but Bulls Remain Steadfast

Tesla is obviously having its share of problems at the moment, but bullish investors haven’t given up on the company’s long-term potential.

Prominent growth investor Cathie Wood, for example, has acquired more than 360,000 shares of Tesla since the post-earnings selloff. Wood once famously projected a $1,400 price for Tesla by 2024, a number that now seems all but completely impossible.

While extreme bulls like Wood may be outliers, it’s clear that there’s still decent support for Tesla among investors. Optimistic voices point to the company’s likely edge in developing self-driving technology and its dominant position in the EV industry to counter its currently weaker performance.

Tesla is also likely to get a modest boost from falling interest rates as the Federal Reserve loosens its monetary policy.

In addition to making growth stocks more attractive, lower interest rates could help car companies increase total sales by stoking consumer demand. This could help the company turn its revenue growth around, though the slower-than-expected pace of deliveries last year will remain a concern even if sales rebound.

Finally, Tesla’s non-automotive projects could help the company diversify and achieve higher growth rates. In Q4, for example, revenue from energy generation and storage rose 10% year-over-year. Though this segment accounts for a small share of the company’s total revenues, this kind of growth is promising enough to give bullish investors some cause for long-term hope.

Will Tesla Stock Rebound?

Over the long term analysts forecast Tesla stock will rebound to fair value of $219 per share.

In spite of several positive aspects, Tesla is facing significant challenges short-term and trades at a steep premium. Even with 15.6% annualized earnings growth expected to continue over the coming five years, Tesla’s pricing appears too high when compared to its performance and the risks with which it must contend.

Tesla could also be facing additional problems relating to the rollout of its long-anticipated Cybertruck. With the first handful of deliveries made late last year, the electric truck is finally heading to a market primed with two million customers with reserved spots on Tesla’s waiting list.

The problem, however, is that sales of the Cybertruck could be quite muted when compared to expectations. The vehicle has half the range originally expected and costs over $60,000. The resulting disappointment among consumers could make the Cybertruck another debable in Tesla’s path to consistent vehicle sales and deliveries.

Ultimately, the recent selloff of Tesla shares appears to be a much-needed correction that has been a long time in the making. That correction, however, may not have run its full course yet.

While Tesla shares could easily rebound in the future if the company can improve its earnings or re-ignite revenue growth, the stock still looks fairly expensive at today’s prices.

Given increasing competition in the EV market, rising operating expenses and more sales challenges potentially on the horizon, it may be best to wait for Tesla’s prices to find a more reasonable level before buying.

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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.