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 patchy time over the past 12 months.
Sales and production volumes have been impacted by a challenging economic backdrop, with weakening demand in key markets like China. Supply chain issues also dealt a tough blow at the start of the year. Musk then laid off 10% of his workforce back in April.
Having said that, Tesla delivered some welcome news to investors on 23 October, when it announced strong third-quarter results. Net income came in at $2.17 billion, up 17% on a year ago, and earnings per share were 62 cents, beating analysts’ expectations.
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Revenues narrowly missed analysts’ estimates, but were up 8% year-on-year at $25.18 billion. Lower costs per vehicle, higher deliveries, and the sale of regulatory credits also boosted the company’s profit margins. Tesla’s share price responded positively to the results.
“These numbers represent a return to form after an underpowered second quarter when profitability dropped sharply amid mounting competition from cheaper models produced in China,” says Russ Mould, investment director at AJ Bell.
He adds: “Significantly, Tesla announced its beleaguered Cybertruck had achieved a positive gross margin for the first time. The next key test for Tesla is to hit its targeted year-on-year increase in vehicle deliveries for 2024, which will require a pretty sizable acceleration in the remainder of the year.”
The ups and downs of Tesla’s share price
Until late 2021, Tesla told a remarkable growth story. The stock boomed in 2020 – its share price rose by more than 700% and it became 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, 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 by more than 40% compared to its peak in November 2021.
So far this year, Tesla is the worst-performing of the Magnificent Seven tech stocks. Even after the recent rally, its share price is pretty much flat year-to-date. It is worth noting that this is a significant improvement compared to the negative share price returns we saw earlier this year, though.
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. “Our company is currently between two major growth waves,” Tesla wrote in its latest investor report. “The first one began with the global expansion of the Model 3/Y platform and we believe the next one will be initiated by advances in autonomy and the introduction of new products.”
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.
The company has also faced increased competition in the key market of China. The Chinese economy has been going through a tough period, and continues to suffer a property market crisis and weak spending. Against this backdrop, more affordable domestic brands can seem more appealing. On top of this, “anti-American sentiment” has taken its toll, according to Danni Hewson, head of financial analysis at AJ Bell.
Despite this, some better news materialised last month (9 October) when Tesla reported record third-quarter shipments from its Shanghai factory in China. The shipments were up 19% year-on-year. However, on 4 November Tesla reported it had sold 68,280 China-made electric vehicles in October, down 5.3% from a year earlier.
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 has previously said it 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 four 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.
At the moment, cost is still a large barrier for many car buyers. With this in mind, Tesla’s plans to start launching new, more affordable models in the first half of 2025 will come as good news to investors. The company reconfirmed this timeline during its third-quarter results.
Should you invest in Tesla?
It has been a mixed year for Tesla overall, with a distinct lack of consistency. Investors will be keeping a close eye on the company as it releases its financial results in upcoming quarters, hoping for less of a bumpy rise. Production and delivery numbers will be in focus too.
Longer term, the company has been clear that it believes its next growth wave will come from “advances in autonomy and the introduction of new products”.
On the first point, there is still a fair amount of scepticism in the market about Musk’s push to develop an autonomous robotaxi service – not least because of regulatory and safety concerns. But on the second point, it will be interesting to see how much demand there is for the cheaper EV models that have been promised in 2025.
In response to Tesla’s strong third-quarter results last month, Morningstar analysts upgraded their fair value estimate from $200 to $210 per share. At the time of writing, Tesla shares are trading at around $249, making them “slightly overvalued”, in Morningstar’s view.
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