Tesla shares plunge double digits: Is valuation now compelling?

Tesla (TSLA) shares experienced a dramatic sell-off on Monday, plummeting by over 12% to reach a new 2025 low. Tesla's shares have now fallen to levels last seen on October 24th, when the stock surged by double digits following announcements from Elon Musk promising a massive increase in the company's sales. Ultimately, the company reported only marginal sales growth in the fourth quarter.

Today's sharp drop in share prices, driven by a confluence of factors, has pushed the electric vehicle (EV) giant's year-to-date losses beyond 40%, marking a significant decline for a company that not only belongs to the Magnificent Seven but also fueled strong gains on Wall Street in 2024.

While the immediate trigger for Monday's decline was a broader market sell-off, Tesla's problems extend far beyond general market volatility. The company is grappling with a series of challenges, including:

• Demand Concerns: Analysts are increasingly concerned about softening demand for Tesla's Model 3 and Model Y in key markets. Weak registration data and revised delivery forecasts from firms like UBS and Redburn Atlantic point to a potential demand problem. This weakness is expected to be reflected in the Q1 2025 financial results.
• Competition: Tesla faces intensifying competition from established automakers and emerging EV manufacturers, particularly in the burgeoning Chinese autonomous vehicle sector.
• Political Controversy: Elon Musk's involvement in political spheres has triggered widespread protests at Tesla locations globally, potentially impacting consumer perception and brand image.
• Financial Pressures: Analysts foresee strained cash flows due to rising inventories and potential cost overruns from tariffs on vehicles imported from Mexico.
• Shifting Investor Sentiment: While long-term visions of AI-powered robotaxis and humanoid robots remain, analysts believe these are distant opportunities and that the current stock valuation already accounts for them. Firms like UBS argue that the valuation is "too high."
• Negative Analyst Outlook: Wall Street sentiment is turning increasingly bearish. Firms like UBS and Redburn Atlantic have reiterated sell ratings, with significantly lowered price targets.Numerous other firms have also reduced their price targets.

The bearish outlook centers on concerns about near-term growth catalysts. Analysts predict another year of stagnant volume growth unless new vehicle models are launched. Projections for a sub-$35,000 car, potentially arriving this year, offer hope that company car demand could rebound.

The protests held in numerous locations worldwide have added another layer of complexity to Tesla's current struggles. Some analysts, such as Wedbush, believe the company is about to embark on its greatest technological leap.⁸ While other analytical firms predict that the share price could fall even further.

It is worth noting that the company is no longer as expensive when viewed from the perspective of the Forward P/S ratio. Interestingly, even at share prices around $400, the company had a ratio of approximately 10, which is not a drastically high ratio for a technology company. As seen in 2022, a significant deviation of the Forward P/S from the 50-month average indicated excessive overselling of the company. Currently, it is not yet that cheap, but the company is beginning to look increasingly interesting from a ratio perspective. Source: Bloomberg Finance LP, XTB.

The stark division of opinion among analysts, ranging from "Strong Buy" to "Strong Sell," underscores the uncertainty surrounding Tesla's future. The company's upcoming delivery report and first-quarter results will be crucial in determining whether it can reverse its current downward trajectory.

The company has experienced two years of downward revisions in earnings forecasts. In December, there was a noticeable jump, followed by a decline in the Forward EPS estimate, but it remains at a similar level to the previous year. In the near future, the company's valuation may begin to look attractive, although at this stage of uncertainty, it is difficult to expect an improvement in analysts' assessments regarding projected earnings. Source: Bloomberg Finance LP, XTB.

The company's shares are falling drastically, reaching their lowest levels since October. At that time, sentiment was buoyed by the promise of double-digit Tesla sales growth. Currently, there is an adjustment of the price to the new realities. However, it seems that in the near future, the company may become attractive, considering the maintenance of sales volume at current levels. Source: xStation5.