Why Tesla’s Stock May Have Passed Its Peak

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Tesla
TSLA
stock has fallen 46% from its peak price of $407 a share in November 2021. Here’s why I think its shares might fall further:

  • Failure to deliver expected revenue and earnings results
  • Trouble with its Cybertruck model
  • Fear of betting on lower-cost cars
  • Price cuts fail to boost sales
  • False hope for a surge in self-driving cars

Tesla expressed concern about cutting its costs low enough to make its vehicles affordable. “I’m worried about the high interest rate environment we’re in,” Tesla CEO Elon Musk said in the earnings call, according to CNBC. “If interest rates remain high or if they go even higher, it’s that much harder for people to buy the car. I just can’t emphasize enough how important cost is. …. We have to make our products more affordable so people can buy it,” Musk concluded.

Failure To Deliver Expected Results

Tesla’s third quarter report fell short of expectations on many dimensions, including the following:

  • Revenue: $23.4 billion, versus $24.1 billion expected, CNBC reported.
  • Earnings per share: 66 cents, versus 73 cents per share expected, according to CNBC.
  • Q3 Deliveries: 435,059 a figure well below expectations and down 6% vs. Q2, according to Investor’s Business Daily.
  • Price cut on model 3 RWD: $1,250 to $38,990, IBD reported.
  • Price cut on Model Y Long Range: $2,000 to $48,490, noted IBD.
  • Gross profit margin: 17.9% — 0.3 percentage points lower than analysts’ consensus, according to FactSet. CNBC attributed this to Tesla “aggressively [cutting] vehicle prices throughout the year.”

Two analysts view the Q3 report as evidence Tesla’s stock is overvalued. To justify Tesla’s stock price, investors have to believe it “can achieve very high volumes and high operating margins, akin to technology or software companies, not traditional auto companies,” Sanford C. Bernstein analyst Toni Sacconaghi told Bloomberg.

Trouble With Cybertruck

Tesla shared disappointing news Wednesday regarding its Cybertruck model. Although the company said in the earnings call that it “remains on track for initial deliveries this year” starting November 30, Musk told investors, “It will take a year to 18 months before it is a significant positive cashflow contributor,” CNBC reported.

Musk estimated Tesla will reach 250,000 Cybertruck units produced per year “sometime in 2025.” Despite imminent shipments, the company “still hasn’t released prices or key specs that would affect Cybertruck demand and profitability,” CNBC noted.

Tesla’s slow Cybertruck progress means “Tesla’s car business faces leaner times well into 2024,” the Wall Street Journal reported.

Fear Of Betting On Lower-Cost Cars

Tesla is blaming high interest rates for putting the brakes on its next-generation vehicle. Since an early March investor day, Tesla had not said much about its progress developing a lower-priced vehicle at a new plant in Mexico, the Journal reported.

Musk told investors October 18 Tesla is slowing down this initiative. As he told investors, “We want to get a sense for what the global economy is like before we go full tilt on the Mexico factory. If interest rates start coming down, we will accelerate,” Musk noted. He expressed fear of a repeat of 2009 when General Motors
GM
and Chrysler went bankrupt and Tesla was “hanging on by a thread,” the Journal reported.

Price Cuts Are Not Boosting Sales

Price cuts aimed at boosting demand are not working as planned. In October 2022, Wall Street estimated such price cuts would result in about two million Tesla vehicle deliveries in 2023, Ryan Brinkman, an analyst at JPMorgan Chase
JPM
, told Bloomberg.

The analyst expressed disappointment that price cuts did not have the desired effect. “Tesla has had to institute these price cuts only to sell fewer vehicles than analysts earlier expected. [Now Tesla’s] “valuation looks increasingly unsustainable,” Brinkman said.

Hopes For A Surge In Self-Driving Cars May Have Been Too High

While Musk is investing heavily in AI, investors are skeptical about whether a payoff — in the form of significant sales of self-driving software — is imminent.

This week Musk waxed optimistic about AI. He said driverless cars and humanoid robots could make Tesla “the most valuable company in the world by far,” noted the Journal. With capital spending up 36% in the third quarter to $2.5 billion — which he attributed to “Cybertruck, AI and other R&D projects,” it is unclear whether a payoff is near, the Journal reported.

Tesla stock has risen some 104% in 2023. Most of that strength came “as investors bet on artificial-intelligence plays, with some saying Tesla has the potential to become a leading AI company,” noted Bloomberg.

Tesla’s potential may take decades to realize. As it could take that long for the company to “deploy its self-driving software,” according to Bloomberg. Another challenge for Tesla will be to maintain its EV industry lead as competition grows.

One analyst said caution about Tesla is warranted. As Bloomberg reported, Adam Jonas of Morgan Stanley asked, “How much of the caution is related to slowing demand for its already ubiquitous product lineup and increased competition?”

Where Tesla Stock Goes Next

Tesla’s stock price target for the next 12 months is $266 per share, according to MarketWatch. With its shares down nearly 2% in early trading on October 20, the price target implies 23% upside.

Yet analysts are skeptical. Here are some examples:

  • Bank of America

    BAC
    : neutral rating and reduced estimates.
    Analysts lowered future estimates due to Tesla’s “lower gross margin profile” and they expressed surprise Musk spent so much time talking about the global economy, according to a BofA Thursday note.
  • Morgan Stanley: disappointed with Q3 results and cautious commentary. Its analysts wrote: “In our opinion, 3Q23 was one of the most cautious Tesla conference calls we’ve heard in years,” CNBC reported.
  • Piper Sandler: lowered price target from $300 to $290 per share. Analyst Alexander Potter kept an overweight rating on the shares. “Cybertruck and other growth initiatives are on the horizon — but still, we wouldn’t be surprised if TSLA trades sideways, at best, in the coming months,” IBD noted.

With a mere 3% of its shares sold short, according to the Wall Street Journal, don’t expect short covering to protect investors should you choose to catch this falling knife.

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