Tesla: Ripe for a Recovery?

Market Updates by Kathleen Brooks, Research Director: 

A last word on Elon Musk

Tesla shares have fallen more than 3% after a judge voided Elon Musk’s $55bn pay package, after an investor challenged the pay packet saying that it was excessive. This means that Tesla’s board now needs to come up with a new package for Musk. He has already asked for a larger stake in Tesla and has threatened to embark on AI projects outside of Tesla if his demands for a greater stake are not met. Tuesday’s ruling could make it harder for Tesla to please Musk in the long term, which adds extra uncertainty to the company’s future.  

Is Tesla the greatest growth stock in the market, even if it missed earnings estimates? 

Tesla missed earnings estimates yet again in Q4. Its adjusted EPS came in at $0.71, vs. $0.73 expected. A weaker quarter for earnings growth was expected by analysts, however, the revenue miss was a shock. Tesla reported revenues of $25.17bn, vs. expectations of $25.87bn. Cost cutting hurt profits, with the Q4 cost of vehicles sold lower than it was in Q3, and gross auto margins also missed expectations at 17.6%, vs. 18.1% expected. Shares initially dropped dramatically immediately after the release and were lower by nearly 5% at one stage, before clawing back some losses. Tesla’s share price has dropped by more than 26% since the start of the year, and these results will be a test of market sentiment. These results prove that Tesla is the ultimate growth stock. Rather than focus on the bad news, Tesla positioned these results as a growth story, and it may just pay off.

Ripe for a recovery 

They say that prices don’t lie. If you believe that statement, then the market has seriously fallen out of love with Tesla, the EV maker with Elon Musk at the helm. The stock price is lower by more than 26% since the start of the year, and it has lost more than $200bn from its market capitalisation. The stock price is at its lowest level since May 2022.  Adding to the spate of bad news, the share price fell more than 13% in the days after its Q4 earnings release, and this is the stock’s longest losing streak since 2016. 

Based on the reception of its latest earnings report, the market is still struggling to find a reason to buy the EV maker and there are still some big issues with the company, which is driving the share price lower. Firstly, the  company reported earnings and revenue that missed expectations for Q4 2023. Secondly, its forward guidance included in this earnings report spooked the market. Tesla said that they would deliver fewer vehicles next year, as they concentrate on building their new platform. Shockingly, the earnings report stated that Tesla could see the growth rate in revenue and deployment in its energy storage business outpace the automotive business.

While diversification is a good thing, autos are what Tesla are known for, and they are the bulk of their business. Being told that the auto business would have disappointing sales growth this year, without giving any guidance on just how disappointing may not help its share price to recover after its weak start to the year. It would appear that being in between two growth waves is not a profitable place to be, and investors typically do not like these messages.

There were other pockets of weakness, Tesla is less bullish on its cyber truck, saying that its ‘ramp time’ will be longer than for their other models, given the manufacturing complexity. Added to this, Tesla earned less revenue from selling its regulatory credits to other automakers to offset their greenhouse gas emissions. Revenue from selling these credits fell to $433mn, down from $554mn in Q3. This could be a sign that other automakers are switching away from the combustion engine and moving towards electric engines, and so need fewer credits. Thus, this decline could be structural and may hurt revenue growth in the future.

Issues for the EV sector could hurt Tesla in the long term 

Tesla has already cut prices for its vehicles at home and abroad, and there is a risk that demand for EVs is fading. Earlier this year, hire car company Hertz cancelled plans to expand its EV fleet. 

Tesla certainly did not sound bullish in the medium term, so why should investors buy the stock? There was no roadmap given as to when Tesla’s next generation of EVs will be produced, and no guidance on how big the decline in vehicle production will be. This is extremely unusual, and leaves investors with little impetus to buy the stock. Some analysts are wondering if Musk decided to set the bar so low for future earnings reports that the only way from here is higher? 

In amongst this gloom it is worth remembering that Tesla cars are still extremely popular, even though competition has exploded in the EV space in recent years. The model 3/Y was the biggest selling car in 2023, according to Tesla, added to this, Tesla’s Fremont factory was the most productive factory in all of North America in 2023, for the third year running, manufacturing nearly 560,000 vehicles. 

We are still waiting to hear updates on Q1 production, a giga factory in Mexico and details about Tesla’s launch in India. All of this could have a positive impact on the stock price. The technical  picture may start to look supportive for Tesla, and it could entice investors back. The stock is looking extremely oversold on a technical basis. As you can see in the chart below, the Relative Strength Index (RSI), which is a useful gauge of whether a stock looks oversold, is at its lowest level for a year.  The RSI can be a contrarian indicator, and when stocks look over-extended to the downside, this can entice some traders back to the market.  At this stage of the year, the fundamental story for Tesla is still weak, but the technical picture may start to improve. 

Chart: Tesla price chart and RSI indicator 

Source: xStation 5 

Please be aware that information and research based on historical data or performance does not guarantee future performance or results. Past performance is not necessarily indicative of future results, and any person acting on this information does so entirely at their own risk.

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Earnings 

Tesla's earnings have undergone a significant transformation since 2014, marked by both losses and substantial growth. So let's take a look at how the company has been performing in the past decade. 

Early Years (2014-2019):

Prior to 2020, Tesla primarily reported net losses, with the trend accelerating from 2014 onwards.The largest loss occurred in 2019 at $823 million. This was primarily due to the high costs associated with developing and launching new models like the Model 3 and Model Y, as well as expanding production capacity. Despite the losses, revenue experienced steady growth throughout this period, steadily increasing from $3.2 billion in 2014 to $24.6 billion in 2019. 

This phase saw the expansion of Tesla's model lineup with the introduction of the Model 3 and Model X, along with the company's initial foray into production with the Gigafactory 1 in Nevada.

Turning the Corner (2020-2022):

2020 and 2022 were marked as pivotal years for Tesla. In 2020, the company made $721 million in net income, rising to $5.5 billion of profit in 2021 and $12.58 billion in net income for 2022. 

Revenue saw a substantial leap, reaching $81.5 billion in 2022, reflecting a 51% increase from the previous year.

The increased profitability and revenue can be attributed to factors like:

• Model 3 & Model Y: The Model 3 and Model Y emerged as Tesla's top-selling vehicles, driving significant sales volume and revenue.
• Global Expansion: The construction and operation of Gigafactories in Shanghai and Berlin boosted production capacity and opened up new markets.

Increased production scale and operational improvements led to cost reduction and improved margins.

Recent Performance (2023):

Q4 2023 Earnings: Although Tesla reported another record quarter in terms of revenue ($25.17 billion), it slightly missed analyst expectations. Tesla revenue for the twelve months ending December 31, 2023 was $96.773B, a 18.8% increase year-over-year. Tesla’s net income for the twelve months ending December 31, 2023 was $15.002B, a 19.22% increase year-over-year.

Additionally, earnings-per-share (EPS) fell short of estimates, coming in at $0.71 compared to the anticipated $0.73.

The earnings miss resulted in a slight decline in Tesla's stock price, raising concerns about potential market saturation and increased competition.

Graphic: Revenue history for Tesla from 2009 to 2023

Source: Companies Market Cap

Graphic: Tesla Market Capitalisation 

Source: Companies Market Cap

Tesla Models

Tesla wasn't always the household name it is today. It started with the luxurious Roadster, a sports car that proved Electric Vehicles (EVs) could be stylish and exciting.

Today, Tesla boasts a diverse lineup of EVs catering to various needs and budgets. The flagship Model S and Model X are luxurious sedans and SUVs, packed with cutting-edge technology and offering exhilarating performance. The Model 3 and Model Y cater to a wider audience with their more affordable price tags and practical features.

Tesla EVs are brimming with innovative technology. The advanced battery systems provide impressive range, while Autopilot semi-autonomous driving features add convenience and safety. Over-the-air software updates ensure your Tesla stays at the forefront, constantly evolving and improving.

Road trips are no sweat with Tesla's extensive Supercharger network. These high-power charging stations dot strategic locations, allowing for quick and convenient recharges on long journeys. The network is constantly expanding, making EV ownership more seamless than ever.

Energy generation and storage

Tesla's vision extends beyond just electrifying the roads. They're also leading the charge in clean energy generation and storage. Tesla's solar panels are sleek and efficient, transforming rooftops into mini power plants. The innovative Solar Roof seamlessly integrates solar panels into roof tiles, generating clean energy while enhancing people's home's aesthetics.

Tesla's Megapack grid-scale energy storage solutions are revolutionising the way we manage power. These massive battery packs store excess renewable energy, ensuring a stable and reliable grid powered by clean sources.

At the heart of Tesla lies a powerful mission which is to accelerate the world's transition to sustainable energy. By making EVs and clean energy solutions more accessible and affordable, Tesla aims to combat climate change and create a cleaner future for generations to come.

Source: Tesla.com

Impact and Controversy

Tesla's journey hasn't been without its bumps. While their impact on the automotive industry and the fight against climate change is undeniable, they've also faced some challenges. 

Tesla has undoubtedly disrupted the auto industry, inspiring traditional carmakers to invest heavily in EVs and pushing the boundaries of technology and design. They've played a crucial role in making clean energy solutions more mainstream. 

Tesla hasn't been immune to criticism. Their high prices, labour practices, and Autopilot system safety concerns have drawn scrutiny. However, the company continues to address these issues and improve its operations.

Final Thoughts 

Despite the challenges, Tesla remains a dominant force in the electric vehicle and clean energy industries. Their innovative spirit, ambitious goals, and commitment to sustainability make them a company to watch. Whether you're a passionate fan or a curious observer, there's no denying that Tesla is shaping the future of transportation and energy.

This comprehensive overview is just a starting point for your exploration of Tesla. As the company continues to evolve and innovate, the story will get even more exciting.