Tesla (NASDAQ:TSLA) has created massive wealth for long-term investors, rising a whopping 16,144% since its IPO (initial public offering) in 2010. However, due to a sluggish macro environment, rising interest rates, supply-chain disruptions, and elevated inflation, shares of Tesla are down about 50% from all-time highs. While investors might view Tesla as an enticing contrarian pick at current levels, I’m bearish on the automobile giant due to rising competition, narrowing profit margins, and falling revenue growth.
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Tesla Disappoints Investors in Q3 of 2023
Tesla announced its Q3 results recently and reported revenue of $23.35 billion with adjusted earnings of $0.66 per share. Comparatively, Wall Street forecast revenue at $24.1 billion with earnings of $0.73 per share in the quarter. It was the first time in more than four years that Tesla failed to beat consensus estimates for both revenue and earnings.
In the year-ago quarter, Tesla reported revenue of $21.45 billion and earnings of $0.95 per share. So, while revenue grew 9%, adjusted earnings fell by 44% year over year in the September quarter for one of the world’s leading electric vehicle manufacturers.
Tesla reduced its cost of goods sold per vehicle in Q3 to $37,500 as its gross profits narrowed by 22%. The company explained that product costs at its new factories were higher than those at established ones as it continues to implement upgrades and benefit from unit cost reductions.
Tesla spent $1.16 billion in research and development compared to $733 million in the year-ago period. It more than doubled the size of its AI (artificial intelligence) training compute for its expanding datasets and Optimus robot project.
Tesla’s Profit Margins are Falling
In Q3 2023, Tesla reported an operating margin of just 7.6% compared to 17.2% in the prior-year period. Its gross margins narrowed by 719 basis points to 17.9%, while operating expenses surged by 43% in the September quarter.
Its declining profit margins and rising capital expenditures meant Tesla ended Q3 with free cash flow of $848 million, 74% lower than the $3.3 billion it generated last year.
Tesla accounts for 20% of total EV shipments in the world and 50% of the market in the U.S. However, due to rising competition, higher interest rates, and lower consumer spending, Tesla was forced to cut its vehicle prices in the past year, negatively impacting its bottom line.
Previously, Tesla shares commanded a premium valuation due to its vast scale of production, widening product portfolio, and industry-leading margins. But in the last 12 months, its profit margins have been lower than some legacy auto manufacturers.
Another major headwind for Tesla in terms of profit margins will be its Cybertruck, which is expected to begin deliveries by the end of 2023. CEO Elon Musk cautioned investors that the Cybertuck would not deliver significant cash flows for at least 12 months once production begins.
Musk emphasized, “It is going to require immense work to reach volume production and be cashflow positive at a price that people can afford.”
Tesla is Part of an Expanding Market
While Tesla stock is expected to remain volatile in the near term, the EV heavyweight is part of a rapidly expanding market. According to a report from Statista, the electric vehicle market is projected to reach $561.3 billion by the end of the year. It is also forecast to grow by 10.07% annually and surpass $906 billion in 2028. EV sales are estimated to increase from 10.25 million in 2022 to 17.07 million in 2028, providing Tesla with enough room to expand its revenue in the upcoming decade.
However, in addition to the ongoing economic downturn, Tesla will have to navigate competition from established companies such as Ford (NYSE:F), General Motors (NYSE:GM), and Volkswagen (DE:VOW), as well as new-age players like BYD (OTC:BYDDF), NIO (NYSE:NIO) and Lucid (NASDAQ:LCID).
Is Tesla Stock a Buy, According to Analysts?
Out of the 33 analysts covering TSLA stock, 14 recommend a Buy, 14 recommend a Hold, and five recommend a Sell. The average Tesla stock price target is $252.61, implying 22.8% upside potential.
The Key Takeaway
Given consensus earnings estimates of $3.22 per share in 2023, TSLA stock is priced at 66x forward earnings, which is quite steep for a company that is struggling to grow its cash flows. Due to its lofty valuation, pricing pressures, and tepid consumer demand, I expect Tesla stock to underperform the broader markets in the next 12 months.
