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Tesla Encounters Growth Challenges as Sales Falter and Stock Suffers

(Bloomberg) - This week's surprisingly low quarterly sales figures from Tesla Inc. have sparked significant investor consternation regarding the company's valuation now that its once unfettered growth has met resistance. The electric vehicle behemoth's sales shortfall was so pronounced that it left Wall Street grappling with whether the expectations for Tesla's revenue and earnings growth over the next few years might be overly optimistic.

Demand Dilemma and Growth Trajectory Uncertainty

Investors are questioning what future growth opportunities Tesla has, contemplating whether it's the electric vehicle market or other ambitious projects. At the core of the matter, as Nicholas Colas from DataTrek Research explains, is the need for a company like Tesla to either provide clear earnings forecasts or a compelling narrative on future profitability to maintain its premium stock valuation. Unfortunately, Tesla is currently offering neither.

A recent report that Tesla was scrapping plans for a lower-cost electric car — a strategy seen as crucial to addressing its demand issues — caused the company's shares to drop by over 6%. Elon Musk took to his social media platform, X, to debunk this story, which alleviated some of the stock’s losses. However, Tesla remained a significant drag on the S&P 500 for that session. Musk's subsequent announcement about a "robotaxi" reveal set for August 8 incited a flurry of after-hours trading.

Gary Black of Future Fund Advisors believes the pursuit of a $25,000 compact vehicle is essential for Tesla to withstand the competition from a multitude of similarly priced EVs soon hitting the market. He warns that focusing on a robotaxi could be perceived as an unnecessary gamble at this stage.

The Market's Precarious Position on Tesla's Valuation

Tesla's stock, having plummeted 34% this year, is not only the largest hindrance to the Nasdaq 100 Index but also the bottom performer on the S&P 500. This appears more striking given DataTrek's analysis which suggests that about 76% of Tesla’s valuation is still based on anticipated future earnings.

Ryan Brinkman from JPMorgan cautioned that Tesla's market capitalization could face further decline unless the company can rapidly rekindle its unit volume and revenue growth, a considerable challenge given its performance. Tesla's actual vehicle sales in the first quarter fell substantially below analysts' forecasts, with only about 387,000 cars sold against the anticipated 449,000. This disparity has led to a downward revision of profit estimates for Tesla, contributing to what would be the second consecutive year of annual earnings decline.

Despite this underwhelming sales performance, Tesla's shares are far from what could be considered a bargain. The company trades at 59 times forward earnings, dwarfing its Magnificent 7 big tech peers. For comparison, Nvidia Corp. and Amazon.com Inc. have multiples of around 36 and 45, respectively. Even more worryingly, Tesla has the lowest growth estimates among these companies for the current year and suffered the largest stock decline in the Bloomberg Magnificent 7 Price Return Index for 2024.

Brinkman also indicated that a material drop in Tesla's revenue is plausible, shifting even the optimistic investor sentiment substantially. Currently, on average, analysts foresee a nominal decrease of about 0.6% in the first quarter revenues, according to Bloomberg data.

Wall Street's Misjudgment on Electric Vehicle Demand

Despite the sudden alarm, Tesla had previously warned of softening demand as early as October of the previous year. Nonetheless, the severity with which this slowdown affected sales was miscalculated by analysts. Adam Sarhan, CEO of 50 Park Investments, remarks that the industry was aware of the diminishing growth tempo in the electric vehicle sector but failed to fully understand its consequential impact on Tesla’s sales last quarter.

A Glimmer of Hope: Tesla's Potential for Rebound

There is, however, a potential silver lining as Tesla's shares might witness a short-term bounce back. The shares managed to close at $164.90 after dipping to lows of $160.51 following the release of the news surrounding the low-cost vehicles. According to technical analysts—who study stock trend movements to predict such reversals—Tesla's stock may be establishing a near-term foundation. The implication here is that the most aggressive stage of the sell-off may have passed, at least temporarily.

"As long as the stock stays above the $150-$160 area, technically, it is trying to trace out a bottom," states Sarhan of 50 Park Investments. Nonetheless, to ignite a sustainable rally in the stock price, investors will need to be convinced not only of Tesla’s growth potential but also of the company's ability to sustain high innovation and profitability margins. At present, the narrative revolves around dwindling demand and an uncertain outlook—factors that greatly impact Tesla's soaring market valuation.

Looking for a Catalyst amid Falling Shares

Recognizing a definitive turnaround is fraught with challenges due to the lack of an immediate significant catalyst. David Mazza, chief strategy officer at Roundhill Investments, suggests that to stem this downward trajectory in share value, Tesla would need to produce a "proverbial rabbit out the hat." With Musk’s hint about the robotaxi development, an attempt to cast such a spell seems underway. However, without concrete news on strengthening the core electric vehicle business, the effect of this announcement might be short-lived or illusory.

In summary, Tesla is at a crossroads where its historical growth narrative is being scrutinized more than ever before. With the pressure on, the company must deliver new strategies and innovations to revitalize demand, reassure investors, and establish a solid growth trajectory once again. As Musk's recent posts suggest, Tesla does have plans that could pivot the company's story, though it remains to be seen whether these will translate into tangible success in the fiercely competitive electric vehicle market. If Tesla wishes to maintain its leading status and value proposition, significant efforts to address these challenges and redefine its market position will be crucial.

©2024 Bloomberg L.P. Original content can be found at Bloomberg.

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