Tesla Risks Doing Something It Hasn't Done Since Launching the Model S, and It Could Trigger a Big Move in Its Stock

Tesla (TSLA) is facing significant challenges, with its stock down 39% from its 2021 high and underperforming the S&P 500, driven by softening EV demand, intense competition, and slowing sales growth. The company's Q3 deliveries missed expectations, and H1 2024 deliveries declined 6.5% year-over-year, despite price cuts that have halved gross profit margins. This context, coupled with a cooling broader EV market and fierce competition from low-cost producers like BYD, puts Tesla at risk of its first annual delivery decline since 2011. Despite these headwinds and projected EPS shrinkage in 2024, Tesla's valuation remains elevated at a P/E of 70, significantly higher than the Nasdaq-100, indicating potential for further downside if core EV business struggles persist.

Analysis

Tesla (TSLA) is facing significant operational headwinds, with its stock down 39% from its 2021 peak and underperforming the S&P 500. The company's EV deliveries declined 6.5% in H1 2024 year-over-year and Q3 deliveries missed Wall Street expectations, signaling a potential first annual delivery shrinkage since 2011. This slowdown is despite aggressive price cuts, which have halved gross profit margins from their peak, indicating a failure to stimulate demand effectively.

The broader EV market is also softening, evidenced by a 44% plunge in European EV sales in August and major manufacturers like GM and Ford slashing EV investment due to soft demand. Tesla faces intense competition from low-cost producers such as China's BYD, whose Seagull model sells for under $10,000, posing a significant threat in key markets like China and Europe. Tesla's planned $25,000 low-cost EV for next year may not fully counter this competitive pressure.

Despite these operational challenges and a forecast for shrinking EPS in calendar 2024, Tesla's valuation remains exceptionally high, trading at a P/E ratio of 70. This is more than double the Nasdaq-100's P/E of 32.1 and significantly higher than Nvidia's 55.7, which projects 138% EPS growth. The current premium valuation, largely tied to non-EV future potential, appears unsustainable given the core EV business's struggles, which account for 78% of current revenue.

Key Decisions for Investors

• Investors should closely monitor Tesla's Q4 delivery figures, as failure to exceed 514,925 units would confirm the first annual delivery decline and likely trigger further stock downside.
• Re-evaluate Tesla's premium valuation (P/E of 70) against its shrinking EPS forecast and the broader tech sector, considering the significant downside risk if the core EV business underperforms.
• Assess the competitive landscape, particularly the impact of low-cost EV entrants like BYD, and the effectiveness of Tesla's upcoming low-cost model in mitigating market share erosion and margin pressure.