Tesla Shares Are Officially Down 40% This Year—Here’s Why The Stock Could Fall Further

Tesla stock notched another grim milestone Friday, extending stock year-to-date dive to over 40%, and there remains plenty of cause to remain highly cautious about the stock in the near term even as it grows cheaper.

Tesla’s 2% loss to about $147 per share Friday, spurred by the company recalling all 3,878 Cybertrucks on the road, was its sixth consecutive day of a more than 1% loss and sent its share price to 65% below its split-adjusted November 2021 peak of over $400.

It’s now the cheapest it’s been since last January to buy Tesla stock, but there’s plenty of negative catalysts behind the steady losses.

Tesla’s nightmarish start to the year saw its January earnings reveal significant misses for both sales and profits; a 9% year-over-year decline in first-quarter vehicle deliveries, far short of forecasts of 7% growth; and comes ahead of the company’s first batch of 2024 financial results Tuesday, which analysts expect to reveal a 5% year-over-year slip in revenues and a 42% drop in profits, according to consensus forecasts compiled by FactSet.

Aside from the bad headlines, what makes Tesla stock still a difficult bet? Simply put, Tesla is still valued like a growth stock—but it’s not growing and isn’t expected to grow in the near term.

Even after the carnage in Tesla’s financial results and projections, its valuation remains far richer than most other public companies’ by a host of metrics: its price-to-earnings ratio—which measures projected profits over the next 12 months compared to a company’s market value—of over 50 is about three times that of the median S&P 500 company, while its earnings yield—which compares a company’s share price and its profit per share over the last year—is the 422nd-best among S&P constituents and its PEG ratio (price/earnings ratio divided by earnings growth rate) is the worst of any S&P firm valued at over $60 billion.

To boot, analysts believe Tesla’s product roadmap is not certain, as its “balls to the wall” push into autonomous driving and reported abandonment of a much-anticipated, lower-cost electric vehicle mean it will likely be a while before Tesla can return to its path of strong earnings growth and ludicrous cash generation that made many investors fall in love with it in the first place, and consensus forecasts don’t expect Tesla to recapture 2022’s record $14 billion profit until 2026.

CRUCIAL QUOTE

“The moment of truth has now arrived for [chief executive] Elon Musk and Tesla,” Wedbush analyst Dan Ives wrote to clients Friday. “Many long-time Tesla believers are giving up,” added Ives, a long-time Tesla bull whose $300 price target for Tesla stock is the highest of any analyst tracked by FactSet.

IF THINGS REALLY ARE SO DIRE, WHY IS IT STILL VALUED SO HIGHLY?

A stock only becomes overvalued compared to its fundamentals because it reflects the market has some reason to think it’s a smart bet. In short, experts believe the thesis to invest in Tesla has shifted in recent months. While it initially appealed to an investor attracted to Tesla’s central electric vehicle business, it is now more attractive to someone who believes in the company’s long-term bid on artificial intelligence, or the carmaker’s ability to make a major breakthrough in its ambitious robotaxi program, which would set a ride-hailing fleet of self-driving Tesla cars onto the road. It’s reasonable to think Tesla can pull this off, considering it grew its EV deliveries from 50,000 cars in 2015 to 1.8 million last year while maintaining incredible capital discipline. But the timeline to stick the landing is far longer than the timeline many investors are comfortable with. To illustrate, Deutsche Bank analysts projected this week that robotaxis could bring in $15 billion in gross profits for Tesla by the end of the decade, but addressing that opportunity will require solving “significant technological, regulatory and operational challenges.”

SURPRISING FACT

ExxonMobil overtook Tesla in market cap Friday, a symbolic passing of the torch from the most valuable renewable energy car company to the U.S.’ largest oil company. At its 2021 peak, Tesla was valued about $955 billion higher than ExxonMobil.

KEY BACKGROUND

Tesla has underperformed the S&P on basically any timeframe dating back to the beginning of 2021, but its returns are significantly better than the broader market for those who got in before the company’s meteoric rise close to the onset of the Covid-19 pandemic. As Tesla’s stock market troubles escalated, so did drama involving Musk, who notoriously bought the social media platform then known as Twitter for $44 billion in 2022, selling off billions of dollars of Tesla shares to do so, undertaking various controversial changes at the site and increasingly wading into political issues rarely discussed by executives of his standing. Musk’s $181 billion net worth is nearly $140 billion lower Friday than it was at its 2021 apex of $320 billion, though he remains the third-richest person in the world, according to Forbes’ calculations. Musk is by far Tesla’s largest individual shareholder at 13%, though a compensation package up for shareholder vote would enable him to up his stake to 22%.