Should you invest in Tesla?

All eyes were on Tesla as it released its first-quarter results on Tuesday, 23 April. 

While Tesla has often featured in the most popular funds and stocks list, the e-vehicle manufacturer has had a difficult year so far, with investors  watching closely for any indication of whether this trend would continue. 

After revealing a sharp drop in production and delivery volumes at the start of April and announcing a 10% cut to its workforce, the latest results felt like a pivotal moment for the company. And despite its profits plummeting by more than half, Tesla’s share price has risen in the aftermath of the announcement on news it plans to bring forward the release of new, more affordable models.

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“Elon Musk says the new product line will not only include more affordable vehicles but will also be produced on the same manufacturing lines as its current vehicle range”, says Russ Mould, investment director at AJ Bell. “That means no massive investment in new factories and the ability to make the most of existing facilities – all good for the bottom line.”

Tesla shares are up 14% on the news, as of market close on Wednesday, 24 April. However, even with this recent boost, the stock is still down more than 60% from its November 2021 peak. 

The company has faced some strong headwinds recently, with sales and production being hit by the challenging economic backdrop. Supply chain issues have also dealt a tough blow so far in 2024, and weakening demand in key markets such as China could continue to be a problem going forward. 

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. 

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 more than 60% compared to its peak in November 2021, and the latest production and delivery volumes paint a worrying picture for investors. 

Although the company’s share price rose in the aftermath of this week’s announcement about new, more affordable models, the financials themselves were disappointing. Profits plummeted by more than half compared to a year ago, and revenue was down 9%. Both measures came in lower than analysts’ expectations. 

“What’s taken the market by surprise, and in a positive way, was the decision to bring forward the launch of new electric vehicle models”, says Mould. “The thought of something new and exciting has led investors to speculate this could be the company’s saving grace.”

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 earlier this month, describing the cuts as a necessary step in preparing the company for future success. 

He wrote: “Over the years, we have grown rapidly with multiple factories scaling around the globe. As we prepare the company for our next phase of growth, it is extremely important to look at every aspect of the company for cost reductions and increasing productivity.”

He added that this would enable the company to be “lean, innovative and hungry for the next growth phase cycle”. 

While it is true that Tesla has now matured as a business, growing pains are not the only factor at play. The company has also run into additional challenges recently – from a tough economic backdrop to supply chain disruption. 

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 have also wreaked havoc for the company since 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. 

Furthermore, 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. 

When you add the company’s maverick chief executive into the mix, there are a lot of factors that could make investors jittery. 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. 

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 includes 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 and broader competition, together with horror stories about Tesla’s vehicles experiencing faults, has pulled the rug from under its feet”, he adds.

Tesla slashed the price tag across several existing models in the US, China and Europe over the weekend to help attract buyers, but moves like this are a double-edged sword. “Lower prices are great for the driver but bad news for the car maker as profit margins are crushed”, Coatsworth explains.

That said, Tesla’s decision to bring forward the production of a new, more affordable line could offer a glimmer of hope. 

Although products with a lower price tag can hit profitability, as highlighted by Coatsworth, 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”, Mould highlights. 

Should you invest in Tesla?

This week has proved more positive for Tesla than many were expecting. Its share price has rallied slightly and Musk has given some clearer direction on the company’s next steps. 

Doubt had previously been cast over his plans for a new, cheaper model after Reuters reported the company was planning to scrap its low-cost car plans. Indeed, Musk does appear to have shelved the new, unnamed vehicle that many were calling the Model 2. However, he announced earlier this week that the company would use its existing production line to start manufacturing other, more affordable models from early 2025. 

This news has excited some investors and boosted the stock’s fortunes. However, investors should not be distracted from this quarter’s financials, which were disappointing. Economic headwinds and the battle for market share rage on, and only time will tell whether a new fleet of vehicles is enough to counteract these challenges.

What’s more, other areas of the company’s product range continue to suffer disappointment. While plans for the new fleet have restored some investor confidence, the company’s new cyber-truck continues to face delays. Furthermore, Tesla recently told employees who work on the model that the length of their shifts would be cut.

In Tuesday’s earnings call, Musk also argued that Tesla should be seen as an artificial intelligence company rather than an e-vehicle manufacturer. “If somebody doesn't believe Tesla is going to solve autonomy, I think they should not be an investor in the company”, he told investors. However, there is a fair amount of scepticism in the market about Musk’s push to develop a robotaxi service – not least because of regulatory and safety concerns.

With these factors in mind, the outlook for Tesla looks better than it did a week ago. However, investors will still be exercising a healthy dose of caution as they move ahead. 

Morningstar recently 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?