Tesla’s massive valuation has made it one of the biggest companies forming the backbone of the US stock market this year. It’s also the biggest underperformer in that group, and there are signs that Wall Street’s enthusiasm is waning.
The EV giant stands out as the only one of the seven biggest companies in the S&P 500 index – a group that also includes Amazon, Microsoft, Apple, Alphabet (Google’s parent company), Meta (Facebook’s parent company) and Nvidia – whose estimated 2024 earnings are significantly lower than they were a year ago.
Tesla shares have been the worst performer in the group by a wide margin since the third quarter earnings season began in mid-October. The stock fell sharply after the company’s chief executive, Elon Musk, scaled back growth expectations in the face of slowing demand and gloomy forecasts from other carmakers.
For the world’s most recognisable EV brand and largest pure-play EV maker, the slowdown means further scrutiny of Tesla’s premium market valuation of around $690 billion – a level that leaves little room for error. The company’s share of bullish analyst ratings is at its lowest since April 2021, reflecting growing scepticism.
“The outlook for EV demand is a big problem for Tesla,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Their continued price cuts are taking their toll, so lower demand will only exacerbate this problem.”
The company’s shares were trading at 56 times forward earnings at Thursday’s close, compared with mid-single-digit multiples for legacy car companies General Motors and Ford Motor. More importantly, Tesla’s price-to-earnings ratio is significantly higher than even its other mega-cap peers.
On average, analysts now expect Tesla’s 2024 earnings to be around 40% lower than they estimated 12 months ago. For the other six, estimates have either risen or fallen very slightly over the same period.
Bullish investors on Tesla are “still looking out to mid-decade rather than the current demand environment” to focus on the next car, self-driving technology and humanoid robot Optimus, among other things, Cowen & Co. analyst Jeffrey Osborne said in an interview. He added that valuing such longer-term potential is challenging given the current economic uncertainty.
“It’s hard for me to be bullish on things beyond cars, especially technologies that don’t work yet and may never work, especially the full self-driving software,” Osborne added.
The cornerstone of Tesla’s valuation remains its EV business, where risks have been rising rapidly. Rising interest rates have pushed up the cost of car ownership, squeezing consumers at a time of high inflation, and EVs, as a new technology, are suffering the most. Musk’s aggressive push to lower the price of Tesla’s cars hasn’t significantly boosted demand.
Tesla’s lower-than-expected 2024 growth trajectory could be due to this broader slowdown in adoption, Deutsche Bank analysts Tim Rokossa and Emmanuel Rosner wrote in a recent note. The second wave of EV consumers may require a much lower entry price, and may be waiting for greater infrastructure – such as a charging network – to be built.
“Although US consumers will benefit from a $7,500 EV incentive credit at the point of sale from January 1, we are concerned that this alone may not be enough to accelerate the US demand curve in the near term, especially in a record high interest rate environment,” the analysts wrote in a client note on Tuesday.
Still, Tesla’s backers remain confident in the longer-term potential of electric cars, which most experts and analysts see as the future of the auto industry. And while the competition to dominate that market will be intense, these investors are betting on Musk’s ability to keep the company ahead of the rest.
“EVs have some big problems, but Tesla is much more than just an EV company because of Elon Musk,” said Matthew Tuttle, chief investment officer and CEO at Tuttle Capital Management. “Elon allows for a higher multiple than you would have if Tesla was just an EV company.”
Tesla shares have rebounded this week after the post-earnings sell-off. The stock was up as much as 2% immediately after the market opened in New York on Friday.
