Tesla (NASDAQ: TSLA) experienced a meteoric rise in 2023, with its stock doubling amid the widespread surge in artificial intelligence (AI) equities. However, the start of 2024 hasn’t been as rosy for Tesla.
The company’s stock has dropped by 15%, triggered by a sequence of negative developments such as price reductions in Europe and China, Hertz’s decision to sell 20,000 electric vehicles – mainly Teslas, and CEO Elon Musk’s contentious propositions regarding voting power and the possibility of building products outside of Tesla.
Despite its extraordinary surge last year, Tesla’s financial performance failed to substantiate a stock upswing. Revenue growth decelerated throughout the year, registering at 9% in the third quarter, with only a 5% increase in automotive sales.
Furthermore, profits dwindled, primarily due to price cuts and heightened industry competition. Net income plummeted by nearly 50%, dropping from $3.33 billion in the third quarter of 2022 to $1.88 billion in the same period of 2023.
Musk vocalized concerns over the impact of higher interest rates and manufacturing complications related to the new Cybertruck, alongside a slower production buildup in Mexico, awaiting clearer economic signals. Additionally, the company is losing the advantage of certain EV tax credits in the U.S.
With Tesla already slashing prices twice this year and the prospect of interest rates remaining unchanged, the company’s return to profit growth seems precarious. The median Wall Street analyst anticipates a 19% profit increase, from $3.15 to $3.74, aligning closely with the projected 20% revenue growth.
Image source: Tesla.
Can Tesla’s Cost Cuts Offset Price Reductions?
According to some Tesla enthusiasts, like Ark Invest’s Cathie Wood, the company’s price reductions represent a show of strength as they will bolster its market share and stymie competitors unable to match lower price points. However, the price cuts, hovering around the 10% mark, instantly weigh on Tesla’s already contracting automotive gross margins, which were at 18.7% in the third quarter.
The table below illustrates the company’s production cost per vehicle over the past year.
| Quarter | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 |
|---|---|---|---|---|---|
| Vehicles produced | 365,923 | 439,701 | 440,808 | 479,700 | 430,488 |
| Cost of goods sold per vehicle | $39,500 | $39,500 | $38,500 | $38,000 | $37,500 |
Source: Tesla.
Tesla managed to reduce its cost of goods sold per vehicle by $2,000 over the last four quarters and may be able to do so again, albeit the introduction of the Cybertruck is likely to drive the cost upward. Alongside potential production cost savings, Tesla is expected to ramp up production in the upcoming year, as indicated by the 20% revenue growth estimate.
While Tesla has yet to provide a production forecast for 2024, the consecutive price cuts following last year’s reductions strongly indicate an impending decline in the price per vehicle sold.
Is Tesla Worth Investing In?
If the company can sustain its cost reduction efforts, Tesla may be capable of achieving some profit growth this year, particularly with its burgeoning energy and services segments. However, the company seems poised to confront a challenging year ahead. Global rivals such as Hyundai and BYD are intensifying competition, interest rates remain elevated, and broader indications hint at weakening demand in the electric vehicle industry.
We will gain more insights when Tesla reports its fourth-quarter earnings next week, but investors should prepare for the stock to trend downward unless a new growth stimulus materializes. The stock is expensive, and its financials alone fail to rationalize its valuation.
*Stock Advisor returns as of January 16, 2024