Tesla regularly features in our ‘most popular stocks’ list, which looks at which companies investors are snapping up on investment platforms. That said, the e-vehicle manufacturer has had a pretty dismal time over the past 12 months.
Sales and production have been hit by the challenging economic backdrop, with weakening demand in key markets like China. Supply chain issues have also dealt a tough blow, and Musk recently had to lay off 10% of his workforce.
These issues have had a big impact on investor confidence. So far this year, Tesla is not just the worst performing of the Magnificent 7 tech stocks, it is also one of the worst performers in the S&P 500.
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Against this backdrop, we look at the investment case for the company going forward. Can Tesla turn it around? What are the growth prospects for the electric vehicle market? And is now a good time to invest in Tesla at a more depressed share price?
The ups and downs of Tesla’s share price
Until late 2021, Tesla told a remarkable growth story. The stock boomed in 2020, rising by more than 700% and making it the world’s most valuable car company.
The pandemic threw environmental issues into sharp focus, and many governments around the world introduced e-vehicle incentives. Tesla benefitted from these trends and, after significant growth in 2020, it was added as a constituent of the S&P 500. This prompted further gains.
More recently, however, the story hasn’t been so positive. The share price is down 56% compared to its peak in November 2021, and the latest production and delivery volumes paint a worrying picture for investors.
Analysts were singing a gloomy tune going into the company’s first-quarter results (released on 23 April), however these struck a more positive note than many had expected. Musk announced that new, more affordable models would be launched as early as 2025, which caused the share price to recover marginally.
Despite this, the financials themselves were disappointing. Profits plummeted by more than half compared to the year before, and revenue was down 9%. Both measures came in lower than analysts’ expectations.
What headwinds is Tesla facing?
On the one hand, Tesla is currently in a period of reset after emerging from several years of stratospheric growth. Chief executive Elon Musk was keen to emphasise this point in a leaked email about staff layoffs in April, describing the cuts as a necessary step in preparing the company for future success.
Despite this, growing pains are not the only factor at play. The company has also run into additional challenges recently.
Firstly, consumers are being squeezed by inflation and higher interest rates. This is impacting sales for many businesses – but those which produce high value items like electric cars are often hit particularly hard in periods like this. E-vehicles come at a premium, and Teslas are more expensive than most. When households tighten their purse strings, luxury items are often the first thing to go.
What’s more, many of the incentives that governments once offered electric-vehicle drivers are now being peeled back, which is weakening demand further.
Supply chain issues also wreaked havoc for the company at the start of the year. Houthi attacks in the Red Sea meant the car manufacturer had to halt production for almost two weeks at the end of January in its Berlin factory. The same factory then suffered an arson attack in March, which prompted another week-long pause in production.
More worryingly, though, the company has suffered a decline in demand in one of its key markets – China. The Chinese economy had a tough year in 2023, and continues to suffer a property market crisis and weak spending. On top of this, “anti-American sentiment and bruised consumer confidence have taken their toll”, says Danni Hewson, head of financial analysis at AJ Bell.
A divisive chief executive and governance concerns
Economic headwinds aren’t the only challenges Tesla faces, though. The company’s maverick chief executive famously divides opinion.
Heralded by some as a genius, Musk isn’t exactly known for being a steadying presence. His penchant for rogue tweets has even caused the company’s stock price to move on several occasions, getting him into hot water with the regulator.
The latest controversy that has Tesla in the headlines relates to Musk’s pay. The company is seeking to award its chief executive a package worth $56 billion – the largest in US history.
Proxy advisory firms including Institutional Shareholder Services (ISS) and Glass Lewis have encouraged shareholders to vote against this ahead of Tesla’s upcoming annual general meeting on 13 June. Many are seeing the vote as a referendum on Musk’s leadership.
Investors will be weighing all of these factors up as they contemplate whether to buy, sell, or hold onto their Tesla stock going forward.
What’s next for Tesla and the electric vehicle market?
As investors assess Tesla’s prospects going forward, a key question for many is: will the electric vehicle revolution rage on, and will Tesla be able to hold onto its market share and grow its profits?
Demand for electric vehicles has weakened in some key markets recently. However research organisation BloombergNEF still expects global passenger EV sales (which include battery electric vehicles and plug-in hybrids) to increase by 21% in 2024, with 70% of those being fully electric.
While that growth forecast is down from 33% in 2023, Bloomberg adds that “battery tech continues to get better, costs continue to come down, and there are now 4 million public charging points installed around the world”. These trends will “pav[e] the way for further growth in 2025 and 2026”, the organisation says, “when a slew of cheaper models is set to hit Western markets.”
What’s more, as we move closer to global net zero targets, the shift towards electric vehicles should accelerate. For example, from 2035, the sale of new petrol, diesel and hybrid vehicles will be banned in the UK. Lots of other countries worldwide are implementing similar deadlines. As these regulatory deadlines loom closer, it is hard to dispute the fact that the future is electric. The real question, then, is which brands will emerge as the winners.
“Tesla basked in the sun for years, claiming a first mover advantage in the electric vehicle space, as well as having highly desirable products”, says Dan Coatsworth, investment analyst at AJ Bell. However, “electric vehicles are now becoming two a penny,” he adds.
With this in mind, Tesla’s plans to bring forward the production of a new, more affordable line could offer hope going forward.
Although products with a lower price tag can hit profitability, Musk plans to produce the new vehicles on the same manufacturing lines as Tesla’s current range. “That means no massive investment in new factories and the ability to make the most of existing facilities – all good for the bottom line,” says Russ Mould, investment director at AJ Bell.
Should you invest in Tesla?
Tesla is currently navigating a tough spot – there is no denying that. Investors will be keeping a close eye on the company as it releases its financial results in upcoming quarters. Production and delivery numbers will be in focus too.
Investors will also be keeping their ear to the ground for any further details on the new, more affordable line Musk is planning for early 2025. Many will be hoping this could help boost the company’s share price.
What’s more, interest rates have now peaked and experts are expecting rate cuts to start soon. The hope is that this will give the economy a boost. Luxury goods companies like Tesla will be hoping this translates into greater demand and more sales.
That said, the economic outlook is still far from certain and Tesla’s battle for market share rages on. Only time will tell whether Musk’s plans for a new fleet of vehicles are enough to counteract these challenges.
What’s more, other areas of the company’s product range continue to suffer disappointment. The company’s new cyber-truck continues to face delays and Tesla recently told employees who work on the model that the length of their shifts would be cut.
There is a fair amount of scepticism in the market about Musk’s push to develop an autonomous robotaxi service too – not least because of regulatory and safety concerns. With these factors in mind, investors will still be exercising a healthy dose of caution as they move ahead.
If you do have conviction in Tesla’s ability to achieve strong performance going forward, the good news is that you can currently buy the stock up at a discount. After Tesla’s most recent earnings, Morningstar revised its fair value estimate for the company from $195 per share to $200, shifting the stock from “slightly undervalued” to “undervalued”.
However, while the company’s shares are cheaper today than they have been for some time, investors should ask themselves two key questions. Will Tesla’s new fleet of vehicles help the company stage a U-turn? And is the share price discount enticing enough to compensate them for the current uncertainty?
