Tesla's market story is all about growth. This is now in question

(Bloomberg) — Tesla Inc.'s shockingly low quarterly sales numbers This week it raises a fundamental question for investors: If the days of fast growth are over, what is the real value of Elon Musk's stock?

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The concerns are valid. The number of cars Tesla sold in the first quarter missed Wall Street expectations by such a large margin that it's worth wondering how much of a demand problem the electric car giant faces given its lofty forecasts for revenue and profit growth over the next few years.

“There's not a lot of visibility into where Tesla's next growth stop will be — whether it's electric cars or its other projects,” said Nicholas Colas, co-founder of DataTrek Research. “If you want to have outstanding multiples, you're going to have to have a great earnings vision or a great story about why those earnings will look in the future. Tesla doesn't have either right now.”

The growth issue around Tesla has become so sensitive that a report on Friday saying the company had ditched plans for low-cost electric vehicles — which were seen as key to fixing the demand problem — sent the stock down more than 6%. Musk was quick to refute the story in a post on his social media site Then after the market closed, Musk posted on X that the company would unveil its “robot taxi” on August 8, causing a spike in after-hours trading.

“Tesla needs a $25,000 compact car as a side product to compete with the many $25,000 electric cars it's launching,” said Gary Black, co-founder of Future Fund Advisors. “Doubling down on robo-taxis at this point would be incredibly risky.”

The story continues

All of which helps explain why Tesla shares have struggled so much this year. Its 34% decline makes it the biggest drag on the Nasdaq 100 since the start of January, and the worst performer on the S&P 500. About 76% of the company's current valuation still rests on its potential future earnings, according to a DataTrek analysis. Over the past year, shares have fallen 11%.

Sales shock

“We caution that Tesla shares could decline much further if the company does not succeed in quickly regaining unit volume and revenue growth,” JPMorgan analyst Ryan Brinkman wrote in a note to clients on Wednesday, citing risks to the market value of Tesla shares. It is no longer viewed as a hyper-growth company.

Tesla sold about 387 thousand cars in the first quarter, while analysts believe on average that the number will be about 449 thousand cars. Earnings estimates for this quarter will clearly now have to be cut, having already fallen by more than half in one year. It also puts the company on track for a second straight year of annual earnings declines. In fact, analysts now expect on average that it will take until 2026 for Tesla to exceed the level of profitability it recorded in 2022.

But that doesn't mean the stock is cheap. At 59 times forward earnings, Tesla is the most expensive member of the Magnificent 7 group of big tech companies. Nvidia Corp. is trading. High-flying companies with a multiple of about 36, and Amazon.com Inc. At 45. However, Tesla has the lowest growth estimates of the three for this year. Its stock is the biggest decliner in the Bloomberg Magnificent 7 Price Return Index in 2024.

Brinkman believes there is a good chance Tesla's revenues will decline meaningfully in the first quarter, “potentially causing more optimistic investors to conduct a sentiment check.” Analysts on average expect a slight decline of about 0.6%, according to data compiled by Bloomberg.

Although Wall Street was surprised by Tesla's problems, no one should complain that it wasn't warned. Tesla first noticed the weak pace of demand in October last year. But the reaction shows how few people have fully grasped the slowdown.

“Analysts knew that electric vehicle growth was declining, but the extent to which that would impact sales was misunderstood on Wall Street last quarter,” Adam Sarhan, founder and CEO of 50 Park Investments, said in an interview.

Possible recovery

With all of the above, Tesla shares could rebound in the short term as dip buyers start digging in. It closed at $164.90 on Friday after trading as low as $160.51 when news of the low-cost cars first broke. Chart technicians, who analyze stock movements to spot such trend reversals, say stocks appear to be finding a near-term bottom. In other words, the most intense part of the sell-off may be underway – at least for now.

“As long as the stock stays above the $150 to $160 area, technically it is trying to find a bottom,” said 50 Park's Sarhan.

But the company will have to show more for the stock price to make a sustainable recovery. Investors need to be convinced that Tesla can return to its strong growth, big margins and highly innovative approaches. For now, the story is one of shrinking demand and a fragile outlook, weighing on the company's towering stock market valuation.

“It's hard to pinpoint a bottom at this point because there's no real catalyst in sight,” said David Mazza, chief strategy officer at Roundhill Investments. Stopping the bleeding in stocks will require Tesla to pull “the proverbial rabbit out of the hat,” he said.

“It seems like Musk is trying to do that with his recent post on robotaxis,” Mazza said. “But unless the company shares specific news about core franchise support for EVs, the effect may be illusory.”

(Adds last year's share decline in sixth paragraph. An earlier version of the story misspelled Musk's name.)

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