Tesla investors will be glad to finally see the back of 2022.
The value of Elon Musk’s company fell twice as much as the broader tech-heavy Nasdaq, decoupling itself entirely from the continued strength of its underlying car business. In comparison to the bruised and battered stock, the company is expected to enter January with yet another annual sales record under its belt.
Musk wants to sell 20 million cars a year come the end of the decade, in order to annually replace 1% of the world’s existing 2 billion combustion engine vehicles with EVs.
And until his fateful $44 billion Twitter deal, it seemed there would always be a customer for every Tesla he could build—without the need to spend so much as a single dollar in ads since Musk himself was a walking billboard.
“The fundamentals are all extraordinary, the problem is all the noise,” Future Fund managing partner and Tesla bull Gary Black told CNBC. “The price has fallen but the value really hasn’t changed.”
Cars are social status items, and typically no one wants to drive—and be seen driving—the exact same one as the next-door neighbor. But Teslas were likened to Apple iPhones: a product so technologically superior to everything else on the road, it didn’t matter if everyone on your block had a Model Y crossover in the driveway—you still craved one.
Yet cracks are beginning to appear in the facade, and 2023 could yet prove to be the inflection point when Tesla’s production grows so fast it churns out more cars than it can actually sell.
Should Tesla’s long-held “infinite demand” narrative start to crumble, then it may need to actually compete for the first time on price. In that case, midterm earnings projections will have to be revised lower as margins compress, and valuation multiples could shrink further, resulting in even more pain for investors.
China pressure valve broken
The most immediate source of the problem can be traced to China, where COVID-related headwinds have returned with a fury.
Cities like Beijing are grappling with their worst wave yet, just when Musk’s largest Tesla plant, Giga Shanghai, keeps increasing production into a softening market. Weekly insurance data showed Tesla sales in December dropped steadily to reach their lowest level in China since it cut prices in late October to reignite flagging interest.
In the past, this wouldn’t be a problem as excess inventory could easily be diverted to growing EV markets like Europe. Unfortunately, Tesla’s new Giga Berlin site is also rapidly expanding volumes and is now pumping out 3,000 vehicles per week.
Local media reports suggest Musk’s new German plant is now in the process of adding a third shift, meaning it will then be running around the clock pumping out cars. That likely leaves just Europe’s few right-hand driving markets as a valve to release pressure, since countries like the U.K. are still supplied out of Shanghai alongside Asian RHD peers such as Japan and Australia.
Softening demand in the Chinese EV market could snap back next year and soak up this excess production once the current wave of COVID infections dissipates.
But there are no guarantees, and for now, it appears as if the public health situation in many Chinese cities will get worse before it gets better.
“The problem is, with a shaky macro and ongoing COVID disruptions, it’s possible that Tesla may become a victim of its own success,” wrote Piper Sandler analyst and Tesla bull Alex Potter. “The company could feasibly run out of buyers in the $50k+ price range just as localized production begins ramping in Europe.”
Rapidly melting order backlog
One of the best sources of real-time information and analysis on Tesla demand comes from Troy Teslike, a Patreon-funded account that tracks the company’s order flow and production. According to its estimates, the carmaker’s global backlog dropped to just 163,000 vehicles as of Dec. 8 from 190,000 vehicles at the end of November with most of the drop coming from China.
On its own, this could just mean the company is finally doing a better job of meeting demand in a timely manner. Most customers do not like to wait half a year to get their Tesla, and past price hikes helped to prevent the backlog from ballooning by making its cars so expensive many prospective customers could no longer afford one.
But with the Model Y now being built in all four of the world’s Tesla plants, existing supply is currently so abundant that a customer in the U.S. or China ordering one today can expect delivery of the finished vehicle in many cases before the end of the month, according to the company’s website. That would suggest capacity is currently more than enough to meet any incremental new orders.
“They have a ton of inventory,” Teslike posted in mid-December. “That doesn’t mean [China] sales are low. It just means they don’t have enough orders to absorb all production.”
Another indicator of potential trouble ahead is the recent increase in incentives. Anyone in the U.S. willing to take delivery of a new Model Y or its sedan sibling, the Model 3, before the fourth quarter closes receives $7,500 off the price of the vehicle and 10,000 miles of free Supercharging.
With the free charging, that should now tempt U.S. customers waiting to see which Tesla models qualify for the EV tax credit, worth a maximum of $7,500, into bringing forward their planned next year purchase as they now stand to gain nothing by delaying.
“I said not to worry about demand until Tesla starts to offer discounts. Here it is,” wrote Fred Lambert, editor-in-chief of EV news site Elektrek.
Recently, Tesla shocked analysts with its aggressive plans to enter Thailand, a midsize Asian market, at prices that undercut many upscale combustion engine cars like the BMW 3 Series that typically sell at a discount to EVs.
“This shows they’re really, really pushing the boundaries to increase volume,” said Matthias Schmidt, publisher of Europe’s leading monthly EV car market report. Even much larger countries like Japan, where some 4.5 million light vehicles are sold every year, are barely interested in electric cars.
Schmidt told Fortune it will be increasingly challenging to squeeze out more vehicle sales without Tesla expanding its product range: “The markets offering low-hanging fruit have now been picked.”
Twitter controversy tarnishes Tesla brand
Then there’s the problem of Musk himself. Sentiment toward Tesla may be tipping as the shine wears off on its once-popular CEO.
Musk’s personal odyssey to restructure Twitter at the expense of neglecting his core business has Tesla investors howling. Singapore-based billionaire Leo KoGuan, the carmaker’s third-largest individual shareholder, went so far as to accuse the CEO of having “abandoned Tesla”—and is now agitating for his removal.
Moreover, Musk’s “chainsaw” approach to cutting costs at Twitter and his chaotic management sparked further questions as to whether his other companies were successful because of him…or in spite of him.
Worse, his embrace of Donald Trump’s alt-right base polls poorly with Tesla’s target audience of climate-conscious affluent buyers in Western markets like the U.S. and Europe. The Atlantic has now branded him a “far-right activist.”
According to a YouGov poll, Tesla’s net favorability score in November showed the majority opinion swung from an overall positive opinion of the company to a negative one.
Morning Consult reached a similar conclusion, determining its popularity among Democrats plummeted by 20.3 points between October and November. This drop was offset in part by a 3.9 point improvement among Republicans.
Emblematic of the Twitter deal’s controversial nature was an unexpected reaction from the crowd when Musk took the stage at a Dave Chappelle comedy show in San Francisco this month. Musk was booed off the stage.
Granted he had just laid off thousands of Twitter employees weeks earlier. Yet California is his core market, the foundation of his success: Tesla is the second most popular brand in the state with an 11% share behind only Toyota.
However one views it, the reaction at the Chappelle show is a far cry from the heady days when Musk was invited to host the iconic variety show Saturday Night Live back in May 2021.
Transport journalist and historian John Bull talks of the “Trust Thermocline,” a point of no return where seemingly satisfied customers abruptly lose faith and abandon a product or business in droves. Musk’s personal brand has served as a seal of approval connecting all his business interests—and that may be taking on water.
Rarefied heights of Mercedes & BMW
According to Cox Automotive’s market research arm Kelley Blue Book, this trust corrosion is already being reflected in U.S. shopping behavior.
Telsa suffered its largest quarter-on-quarter decline in purchasing consideration of any luxury brand, a three percentage point decline to 12% that saw it fall one space to sixth. Meanwhile, the newest Tesla, the Model Y, dropped out of the top 10 most-shopped luxury list altogether, a first in two years.
“The biggest challenge is that the perception of Musk—and now the perception of Tesla—has now been damaged,” Michelle Krebs, executive analyst at Cox Automotive, told Fortune. “They haven’t freshened product, either, and they’ve had a lot of service problems where Tesla cars have to be fixed by GM dealers.”
With his existing range now long in the tooth and the new Semi commercial haulage truck likely to remain a niche product for the foreseeable future, hopes rest on the Cybertruck as the next big catalyst for growth.
While the stainless steel vehicle has earned many fans, series production may not arrive until the end of 2023, and details about the final product offering remain under wraps. Potential customers might balk if it is priced too high for its specifications or the wait times are too long, since they will likely have three alternatives from which to choose by then: the Rivian R1T, Ford F-150 Lightning, and the Chevrolet Silverado.
None of this is particularly comforting now that the company is expected to enter the year with production running at 40,000 units per week, translating to roughly 2 million vehicle that need to be sold across the whole year.
These are rarefied altitudes. Of all the various brands competing for buyers of premium-priced cars, from Lexus and Infiniti to Land Rover and Volvo, none have ever cracked that ceiling. Previously it was the sole reserve of dominant German brands Mercedes-Benz and BMW. Not even close rival Audi managed this feat, topping out at 1.88 million in 2017.
“There is only a limited number of people that can afford to pay for a premium car, and Tesla is just approaching that key fundamental 2 million unit-per-year boundary,” said industry analyst Schmidt. “Growing beyond that level could prove tougher than they expect.”
Board seen “MIA” as buyback demands mount
Could a slowdown in sales hurt the stock after volumes surged nearly 90% in 2021 and are expected to eclipse 40% this year?
Shares have already taken a dive this past year, so a lot of bad news has been priced in compared with tech bellwethers Apple and Microsoft, which both dropped some 30% year to date in response to the Fed’s inflation-fighting interest rate hikes.
Yet much of Tesla’s weakness can be traced to Twitter. The stock has fallen by roughly two-thirds since mid-September, once it became clear that Musk’s legal chances to pull out of his own acquisition deal were rapidly dwindling and he would have to raise more capital to fund the purchase.
According to portfolio manager Black, this precipitous decline is in large part due to the Twitter overhang. Musk has had to liquidate 94 million Tesla shares at an average price of $244 since he launched his takeover plans. This has netted a whopping $23 billion in gross proceeds—more than the entire market cap of Internet auction platform eBay.
The stock, trading at little more than $100, has now plumbed lows not seen since August 2020. Alone this month it has nearly halved in value amid speculation investors have been forced to sell to meet margin calls or are dumping stock before the year ends for tax purposes, so-called tax loss harvesting.
Musk’s stated goal from October to one day be worth more than the world’s two most valuable companies, Apple and Aramco, combined appears further away than ever given Tesla’s once trillion-dollar market cap has crashed below $350 billion.
This has prompted shareholders like Ross Gerber, CEO of investment firm Gerber Kawasaki, to call for the company to purchase a considerable number of shares on the open market next year to prop up the price. Expectations currently hover around the $10 billion mark.
“Tesla should announce a buyback immediately and stop the dilution from Elon’s sales,” he posted, thundering its board was “MIA”—missing in action. He has now asked fellow investors to support his request to join as a director.
After a torrid week that saw the stock underperform the Nasdaq by over 10% following Musk’s latest sale, he appears to be rowing back, putting his leadership of Twitter up to another user vote (that he lost). And while it’s unclear whether he intends to honor his pledge anytime soon to abide by the poll’s result, he would be able to focus his efforts on Tesla once more should he pass the torch on to a suitable successor.
For his part, the entrepreneur himself refutes being the primary cause, instead lecturing investors like Gerber and Black that the Fed’s rate hikes are to blame for the declines.
But for now it looks as if the luster has worn off the carmaker thanks to Musk’s Twitter antics, just when its perhaps closest rival, the Warren Buffett–backed Chinese EV manufacturer BYD, is expanding into Europe. It’s not inconceivable Tesla may have to compete much more on price and (gasp!) even begin to spend on advertising to get customers into showrooms.
So while Tesla will no doubt enjoy another record 2022 with over 1.3 million vehicles sold and further growth to come, the market trades on expectations of future profits. Investors have already penciled in sales ranging from 1.9 million vehicles to, in Black’s case, even 2 million into their forecast for 2023 earnings.
Should fears of a demand problem with Tesla subsequently prove true, then get ready for a bumpy ride.
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