Renowned for his audacious humor, Elon Musk recently made a jesting remark about allowing screwdrivers and drills on all Boeing flights so passengers could assist in maintaining the aircraft’s integrity. Ironically, Musk’s own business, Tesla, seems to be undergoing substantial upheaval. In terms of shares performance, Tesla is the second-worst company in the S&P 500 this year, only surpassed by the controversy-ridden Boeing. Since January, Tesla’s shares have plummeted by over 30%, reaching a low not seen since the previous year.
Concerns Over Tesla’s Performance
The industry is becoming increasingly concerned that Tesla, now ranked second behind BYD, could reveal quarterly results displaying neither increased sales nor earnings. Musk had managed to boost sales via a series of significant price reductions last year, despite cutting into Tesla’s profits. However, as sales volumes are expected to stagnate compared to last year’s first quarter, fears are growing. In the past, Tesla investors anticipated sequential improvement in volumes. Therefore, sluggish year-on-year growth would be a major disappointment, particularly given that annual increases were as high as 83% in the past few quarters.
The Potential Impact on Tesla’s Growth Stock
Should Tesla only manage a minor increase over Q1 of 2023, it risks transforming into a growth stock without the growth. This unfavorable combination could cause severe multiple compression as fewer investors may be willing to pay 60 times earnings to own a company mired in stagnation. “The impact of the price cuts are surprisingly low at this point,” Colin Langan, a Wells Fargo analyst, told CNBC after he shocked markets by downgrading Tesla to sell on the back of a prediction that annual sales volumes would be flat this year at around 1.8 million cars.
Tesla seemed to confirm these fears when it warned buyers last week to order their new $43,990 Model Y now before the end of the quarter or face a $1,000 price increase effective in April. The message was not interpreted as an indicator of heightened demand but rather as an attempt to boost volumes before the end of the quarter while providing an excuse for potential sales drops in the next three months.
Shifts in Tesla’s Growth Direction
Since the launch of the Model Y in 2020, Tesla has only known one direction: up. Each and every quarter has always been better than the last, with just one brief exception due to factory upgrades. Even during the chip crunch, Tesla was busy manufacturing more cars while others were forced to mothball their plants. The company’s ability to consistently produce exponential sales growth in the face of adversity is why it earned its high valuation. However, even longtime Tesla bulls are at least temporarily getting out, evident in Kevin Paffrath‘s decision to sell all 36,840 shares in the company and actively short it.
Three Key Levers for Profitable Growth
Three key levers drive carmakers’ profits. The first one is prices. The second is the mix: selling larger-sized models skewed to popular body styles like SUVs and pickups in wealthier countries generally yields better profits. The final and most crucial lever is volumes. Since almost all carmakers operate their own plants, these need to be consistently producing automobiles to achieve a return. Tesla’s problem is that mix and pricing are likely going to be net negatives, meaning it must rely on volume growth to fuel Q1 profits.
Price Cuts Impact on Existing Owners and Fleet Buyers
Musk’s strategy of cutting prices to maintain growth, which initially seemed successful, may have ultimately backfired. Not only has he trained customers to wait in hopes of getting a better deal, but he’s also upset many existing ones. Rental agencies Hertz and Sixt both suffered as the value of their cars in the used car market plummeted. SAP, a Salesforce rival, removed Tesla from the list of brands eligible for its company car fleet.
It appears Musk needs to spend less time trolling Boeing and more time figuring out how to reignite his own sputtering growth engines. For more insights into the auto industry, subscribe to the Eye on AI newsletter to stay up-to-date on how AI shapes the future of business.
