Tesla’s Growth and Valuation in an Era of Slowing EV Demand

Source: The Verge

Growth Expectations on Overdrive

Over the last ten years, Tesla has been a prominent figure in the world’s drive toward an innovative society. With Elon Musk operating as the CEO of the company, Tesla’s stock quickly boomed in 2020, as its stock price soared by almost 8x, from levels of around $90 at the beginning of the year to over $700. The performance of the stock made Tesla one of the top performers in the S&P 500 and further illustrated Musk’s promises in the innovation of autonomy, energy, and artificial intelligence. However, looking past the stock’s 2020 boom, the cracks in Tesla’s dominance are now starting to become more evident. For the first time in years, Tesla’s global vehicle deliveries decreased, resulting in a 13% decrease in the first quarter. Tesla is in a difficult position as the EV market slows down toward a moderate phase and rival brands release more affordable electric and hybrid options. 

Despite the challenges that Tesla currently faces, investors' valuation of the company is still considered astonishing. Tesla’s price-to-earnings ratio is roughly above 150 times, relative to other rival automaker companies like Ford, which are under 10 times. (Yahoo Finance shows 172x for Tesla and 7.9x for Ford). The market and investors still deem Tesla as having high growth, as if they are unaware of some of the company's negative current trends in the EV space. One of the most interesting aspects of today's international markets is the discrepancy between the company's actual performance (sales and production numbers) and what investors anticipate will happen in the future (reflected in the high stock price and valuation).

Tesla’s share price surged nearly eightfold in 2020, marking one of the fastest value increases in modern market history.

Source: Bloomberg / Yahoo Finance

A Decline in the EV Boom

In recent years, the demand for electric vehicles has skyrocketed, with Tesla commanding an astonishing  79 percent of sales in 2020. That dominance, however, has begun to erode. Due to fierce competition both domestically and internationally, trends are currently diverging. For instance, in their second largest market, which is China, Tesla’s sales dropped to 26,006 vehicles in October, their lowest in three years. Also in Europe, Tesla's sales plummeted around 50% in April as a result of Chinese automakers manufacturing far more modern and reasonably priced models. Similarly, in the United States, the Model 3 and Model Y were perceived as being overpriced due to the introduction of less expensive models by rival companies.

As a result, Tesla's profit margins have shrunk due to increased market competition, which has caused profit margins to be at their lowest point since 2019. According to market analysts, supply chain expenses, consumer adoption, and the demand constraints associated with expensive electric vehicles will all slow down. In today's world, electric vehicle demand and growth are generally increasing, but for Tesla, these trends are declining.

Global EV market share: BYD vs Tesla (2023). Source: Statista

To Infinity and Beyond

Despite its weaker fundamentals, investors and markets continue to value Tesla for its high future growth. Rather than viewing Tesla as a conventional automaker like Ford and Kia, investors view Tesla more as a tech company. The valuation placed on the company by investors reflects future expectations for the business and instead focuses on the idea of autonomous cars that develop into energy storage and software driven by artificial intelligence. A quote from Musk states, “We should be thought of as an AI robotics company. If you value Tesla as just an auto company, it’s just the wrong framework.” Some argue that Tesla's classification as both a car manufacturer and a tech company adds to its premium since it can generate additional revenue streams for the business and only helps them. On the other hand, many think that Tesla is boldly ambitious, with a lot of unproven goals, which is the reason for its high valuation; some feel that the company has no room for error. Thus, the clear disconnect between narratives on both sides drives the market. Long-term investor confidence surpasses the company's current financial situation; only time will tell which side will be right.

The Price of Innovation

Tesla’s situation illustrates how investors approach the market, its growth, and risk. The interesting thing is, the market is willing to overlook current trends, such as Tesla’s slower demand in its EV space, instead of favoring companies that have strong growth and can weather tough economic times. Although it may sound convincing, it raises concern and questions: Can Tesla’s sky-high valuation last if the economy slows drastically or market conditions become very volatile?

The company's future has a significant impact on the suppliers and other businesses in the global EV market. If Tesla does happen to slow down, it will affect different companies, industries, and their investments; it will also dictate how other companies choose to price their clean-energy EV products.

Source: LHP 

Vision or Value

With Elon Musk at the head of the company, Tesla has realized amazing growth and significant future potential in different industries. Although the future is unpredictable, it is clear that investors are betting that the other spaces that Tesla is investing in have significant growth potential and can change the way that we all function in this world. Only time will tell if Elon and Tesla will succeed in continuing the massive growth it has had in the past. I, for one, will not be the person who bets against one of the smartest people of our time.