Tesla The stock tumbled more than 10% on Thursday as investors assessed the impact of the electric vehicle (EV) giant’s aggressive price cuts and what CEO Elon Musk calls an “uncertain” economic environment.
Tesla has reduced the prices of some of its most popular models six times this year alone to boost demand amid increasing competition in the EV market, but analysts have warned against it sacrifices margins. Investors got their first taste of what that might look like after the bell on Wednesday, when Musk and his company reported first-quarter results.
While Tesla’s first-quarter revenue rose 24% year over year to $23.3 billion, net income went the other way, falling 24% to $2.51 billion. Price cuts also pushed the company’s gross margin down to 19.3% from 23.8% last quarter, well below Wall Street’s consensus estimate of 21.1%.
Additionally, Musk said in the subsequent conference call that the economy was facing “stormy weather,” which could prompt consumers to postpone “big new capital purchases like a new car.” He also noted that the Federal Reserve’s rapid rate hikes over the past year have had a serious impact on affordability: “Every time the Fed hikes rates, it equates to an increase in the price of cars.”
Musk’s comments and Tesla’s recent earnings disappointment have pushed the once-beloved stock even deeper into what David Trainer calls the “danger zone.”
“Following first-quarter results and yet another missed growth target, we continue to view Tesla as one of the most overvalued stocks on the market,” the CEO of investment research firm New Constructs warned in a statement Thursday.
Trainer believes investors are pricing in auto sales growth and margins that aren’t realistic, and that Tesla stock poses a “major downside risk” amid intensifying competition. And he means business when he says “down,” arguing that even under “optimistic” circumstances, the stock could fall as much as 80% to just $28.
Waning growth, increasing competition
The booming EV market has allowed Tesla to rapidly increase its vehicle deliveries for years, and many analysts have argued the trend will lead to it keep going. But Trainer notes that Musk’s EV giant fell short of its own lofty 50% year-over-year growth target.
In the first quarter, Tesla managed to deliver 440,808 vehicles, a 42% year-over-year increase in deliveries — even with aggressive price cuts. The missed delivery targets are largely due to the rise of Musk’s EV Competitionaccording to coach.
Out of Volkswagen unveiling of a four-door flagship ID.7 on Monday and a Mass market, affordable EV last month to launch Toyota’s promise 10 new EV models By 2026, Tesla competitors are aiming to take market share from Tesla.
“Competition is not fading as legacy automakers have ample resources and cash flow to invest in the EV market for years to come,” Trainer wrote Thursday. “Tesla faces an increasingly uphill battle to maintain its competitive position, making its current valuation even more unrealistic.”
A high rating
While Tesla has been hurt by increasing competition from electric vehicles, Trainer believes the main problem may be how overvalued the stock is for investors. The EV giant is trading at more than 45 times its last 12-month earnings, compared to the S&P 500 average of just 22.
However, price-to-earnings ratios are often criticized by analysts for failing to take into account a company’s future growth prospects. With that in mind, Trainer proposed another method of valuing Tesla, which works backwards from a company’s stock price to determine how much cash flow they would need to generate to justify their current valuation, called the reverse discounted cash flow model (DCF).
He noted that to reach $200 per share, Tesla would need to sell up to 30 million electric vehicles by 2031. For comparison: In the whole of last year, only 10.6 million electric vehicles were sold worldwide World Economic Forum. In their latest report, Trainer and his research team broke down several “undeniable best-case scenarios” for Tesla, including one that sees the company become the world’s largest automaker within a decade, noting that the stock is still “significantly overvalued.” ” is.
But there is always another side to the story…
While even the most optimistic Tesla analysts now admit that the company is facing a “EV price warMany still believe the stock can outperform. Tesla currently has 21 “buy” ratings, 16 “hold” ratings, and only 5 “sell” ratings on the road Data out of The Wall Street Journal .
In a Thursday note, Wedbush tech analyst Dan Ives cut his target price on Tesla to $215 from $225, but said he remains “very bullish” on the company’s long-term history. He argued that Tesla reported “mixed results” in its most recent earnings report, but acknowledged that the “elephant in the room” is “softer margins.” Still, the analyst believes Musk’s strategy of sacrificing margins to secure long-term increases in demand will pay off in the long run.
Gene Munster, another optimistic veteran analyst who is now a managing partner at Deepwater Asset Management, pointed to the growth potential of Tesla’s fully self-driving “Robotaxi” business, noting that Musk said the CyberTruck “could be with delivery.” begin”. third quarter.
“In the end, I believe the company will find a balance between margins and growth,” he wrote in a statement Wednesday, arguing the company offers long-term upside potential.