Tesla is getting a reality check at a $94 billion market cap as EV winter arrives

By Esha Dey

Tesla Inc. had a blockbuster in 2023, when its shares more than doubled in 12 months. But 2024 is starting on a different note, as Elon Musk’s electric vehicle maker is off to its worst start ever.

The company has lost more than $94 billion in market value in the first two weeks of 2024. It’s not hard to see why, as the Austin, Texas-based EV maker has been inundated with a barrage of negative news: an approximately… facing electric vehicles from car rental giant Hertz Global Holdings Inc., another price cut for are cars made in China, and signs of rising labor costs.

All this comes in light of slowing growth in demand for electric vehicles, especially in the US.

“Investors’ biggest concern about Tesla is stagnant growth,” Cowen analyst Jeffrey Osborne said in an interview. The price cuts in China are only fueling these concerns as it is starting to look like “a race to the bottom for the EV industry given the fierce competition in that market.”

The hit to Tesla’s market cap at the start of the year is the biggest the company has seen in a comparable period since its IPO in 2010. In percentage terms, Tesla’s 12% decline since early January is the worst since 2016, when stock prices fell. fell 14% over the first nine trading days of the year.

To make matters worse, the chances of an imminent turnaround for the EV manufacturer don’t look good.

Tesla has been aggressively cutting prices for its cars since early 2023 in an effort to stimulate demand. But the result has been a steady erosion of the once-large profit margin. Tesla’s automotive gross margin, excluding regulations, fell to 16.3% in the third quarter, down from 27.9% a year ago. And the pressure is only increasing as production workers at Tesla’s U.S. factories get raises.

“We are experiencing a cyclical downturn for electric cars, but competitive dynamics are exacerbating the cyclical pressures,” Ivana Delevska, Chief Investment Officer at Spear Invest, said in an interview. “Price cuts and declining margins are all a function of these adverse competitive dynamics.”

Adding to the woes, Tesla has had to divert shipments destined for its Berlin factory following Western military actions and security concerns in the Red Sea, and suspended most production at its factory near Berlin from January 29 to February 11 , according to a person familiar with the matter.

Not strong enough

Tesla first warned about the slowdown in demand for electric vehicles during its third-quarter earnings report in October. Almost immediately afterward, automakers and suppliers around the world chimed in with their own dire predictions. Many automakers have scaled back their expansion plans.

Then, earlier this month, Tesla reported fourth-quarter delivery figures. Although they were better than what analysts expected, they placed the company behind China’s BYD Co. in terms of global sales of electric cars.

The result was a rude awakening for Tesla investors. Last year, the stock was the eighth-best performer in the S&P 500. This year so far, it’s the eighth-worst.

Of course, Musk will have to deal with a big blow personally. The world’s richest person, who acquired more wealth than anyone on the planet in 2023, has seen his net worth shrink by $23 billion so far this year, according to the Bloomberg Billionaires Index. Musk regained the top spot on the Bloomberg wealth index last year, overtaking Bernard Arnault, but now Jeff Bezos is fast closing in, with $179 billion to Musk’s $206 billion at the end of Friday.

Most of Musk’s net worth comes from his 13% stake in Tesla and approximately 304 million exercisable stock options. He also owns about 42% of SpaceX, which is valued at about $53 billion, according to Bloomberg’s wealth index.

Still the one

That said, Tesla remains a key player in the global transition from gas-powered vehicles to largely electric vehicles. The reason: It’s so far ahead of its potential rivals. China’s BYD may have surpassed Tesla in the number of units sold, but it still lags behind in terms of revenue and profit. And BYD doesn’t sell cars in the US, where Tesla remains the market leader.

In many ways, Tesla’s biggest problem may be its past success and the hope it has generated. As investors poured into the stock, Tesla’s market capitalization soared, making it far bigger than any other car company in the world. However, because the shares were priced for perfection, they were also highly vulnerable to large reactions to negative news.

That’s why so many Tesla proponents argue that it shouldn’t be compared to mainstream car companies. For them, the company’s ultimate true value lies in the future and the hope is to develop the first truly self-driving vehicles. The only problem is that Tesla has been promising this for years, and most experts say the technology is still years, maybe even decades, away.

“Tesla has failed to deliver on the promises of fully autonomous driving and AI that are already embedded in its valuation,” Spear’s Delevska said. “To simply be another automaker is not going to cut it at a $750 billion valuation.”

First print: January 13, 2024 | 7:56 PM IST