Tesla shares plunged over 12% in after-hours trading on Wednesday after the electric vehicle maker reported fourth-quarter earnings that fell short of expectations and warned that sales growth would slow in 2024. The sharp stock drop wiped out over $50 billion from Tesla’s market valuation, raising questions about the company’s ability to sustain its meteoric rise.
Financial Results Disappoint as China Sales Slump
Tesla posted adjusted earnings per share of $1.19 on revenue of $25.17 billion in the fourth quarter. Wall Street analysts had forecast earnings per share of $1.29 on revenue of $26.16 billion (CNN).
The 12% year-over-year decline in quarterly earnings marks the first such drop for Tesla as a public company (Forbes). Profit margins also narrowed from over 30% a year ago to under 25% last quarter.
Tesla attributed the disappointing results primarily to a slump in demand from China, its second largest market after the United States. The company’s sales in China plunged 44% in December as competition heated up and government subsidies for EVs expired (CNN). This raises concerns that Tesla’s growth story in the world’s largest auto market may be hitting roadblocks.
| Key Figures from Tesla’s Q4 2023 Earnings | |
|---|---|
| Revenue | $25.17 billion |
| Adjusted EPS | $1.19 |
| Global Deliveries | 405,278 vehicles |
| Operating Margin | 24.9% |
Growth Rate Projected to Slow Notably in 2024
Adding to investors’ worries, Tesla said it expects electric vehicle volume growth in 2024 to be notably below the 50% rate achieved in 2023 as macroeconomic uncertainties persist (CNBC). CEO Elon Musk reiterated on the earnings call that a recession in the United States is likely at some point this year, which could further dampen consumer appetite for big ticket purchases like cars.
Tesla’s warning of slowing growth in 2024 caught analysts by surprise. “This outlook contrasts negatively with the much more upbeat prognosis provided just three months ago,” said Morningstar analyst Seth Goldstein (Morningstar). Prior to this quarter, Tesla had guided for volume growth of 37% in 2023 and had given no indication that 2024 growth would dramatically slow.
The lower growth outlook raises uncertainty about demand for Tesla vehicles, especially given recent price cuts. It also suggests Tesla sees challenges ramping up production at new factories in Texas and Berlin over the next year.
Price Cuts Sacrifice Profitability for Volume
In a bid to spur demand after missing CEO Elon Musk’s target to sell 1.8 million vehicles in 2023, Tesla recently slashed prices globally on its Model 3 and Model Y vehicles by nearly 20% (Yahoo Finance).
The price cuts seek to improve affordability and boost sales volumes. But they come at the expense of profit margins, which Tesla acknowledged would be lower in the near term. Restoring margins likely depends on Tesla achieving greater economies of scale in production and reducing costs further down the line.
“Pricing changes are providing opportunities for lower income consumers to afford Teslas but it comes as the automaker tries to improve manufacturing efficiency,” said Dan Ives, analyst at Wedbush Securities (Yahoo Finance).
Next Generation Platform Teased for 2025
The earnings call was not without some positive news. Tesla said it plans to introduce its next generation vehicle platform in 2025, which would underpin new affordable model lines (Electrek).
Dubbed project “Highland”, the platform aims to enable larger volumes at lower costs to make Tesla vehicles more accessible to mainstream consumers, according to CEO Elon Musk (InsideEVs). The new models could help catalyze Tesla’s growth when they launch, but 2025 is still a ways off.
Additionally, Tesla continues to make progress ramping production at new factories, including Gigafactory Texas which recently started delivering the long-awaited Cybertruck pickup (The Verge). While the factories should enable Tesla to increase volumes substantially in the coming years, near term headwinds are weighing on growth.
Concerns Mount About Tesla’s Valuation
Tesla’s first ever year-over-year decline in annual earnings and warning of slower growth put its premium stock valuation under the microscope. Shares trading around $133 on Thursday reflect a price-to-earnings ratio near 50 based on 2023 profits (Yahoo Finance).
With Tesla projecting tougher sledding ahead, analysts debated whether the stock price properly reflects risks to growth and earnings.
“Tesla has to significantly boost production and sales volumes in the coming years to justify its valuation,” said David Trainer, CEO of New Constructs investment research firm (Yahoo Finance).
Others argue Tesla deserves a premium multiple given its leadership in electric and self-driving vehicles. “We continue to believe Tesla’s leadership position in EVs and massive addressable market opportunity in energy storage, solar and autonomy make shares attractive for long-term investors,” Ives of Wedbush said (Yahoo Finance).
How Tesla executes on ramping production and boosting volumes in the face of macro uncertainty will determine whether shares rebound or remain under pressure. Musk and Tesla have repeatedly defied naysayers in the past. But with the company signaling tougher times ahead, doubts are growing about the stock’s astronomical rise.
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