Trouble at Tesla: the end of a golden age of growth?

Paul English is the kind of serious Tesla fan who helped make Elon Musk, for a brief period, the richest person in the world.

The Boston-based tech entrepreneur, co-founder of the travel website Kayak, bought his first Tesla in 2013, went on to invest in the company three years later and now drives the latest Model 3.

But after witnessing the Tesla chief executive’s behavior since his acquisition of Twitter late last year — including Musk’s brutal treatment of staff as he began to cut about half of the media company’s workforce social – English says he’s not sure he’ll buy another Tesla.

Musk “made a massive misjudgment,” he says. “Teslas were mostly bought by people who like change and new things. These are usually people who are educated and people who are liberal. Guess what educated, liberal people don’t like? Bullies.”

Musk’s take on Twitter didn’t sit well with Wall Street, which feared the chaos and political polarization it unleashed would tarnish the automaker’s brand and distract it at a critical time. A slide in Tesla’s stock price that began in the fall turned into an avalanche; shares are now 73 percent below their peak just over a year ago. Musk himself is $200 billion poorer.

But while the Twitter drama dominates the headlines, a profound shift in Tesla’s outlook is also underway. A wildly successful period in which the company’s value peaked at nearly $1.3 trillion and after-tax profits were forecast to reach almost $13 billion in 2022 has quickly given way to a darker economic picture. The main concern of Tesla investors has come from how the company can produce enough cars to meet demand, where it will find enough customers to justify its sharply increased production.

Growth in new vehicle deliveries slowed to 40 percent last year from 87 percent a year earlier — still a dangerous pace for a major automaker, but below the 50 percent annual rate Musk himself has set. as a benchmark for the foreseeable future.

With Tesla quickly ramping up production at giant new factories in Texas and Germany, it now has the added problem of finding many more customers, said Philippe Houchois, a global auto analyst at Jefferies in London. This has left it facing a “perfect storm”, he adds, of rising supply, falling demand and intensifying competition, all on the brink of what could be a severe downturn for the global auto industry. .

Elon Musk arrives at the Tesla Gigafactory in Grünheide near Berlin. His take on Twitter didn’t go down well on Wall Street, leading to a drop in Tesla shares © Odd Andersen/AFP/Getty Images

That has left Wall Street reeling from clues about the company’s prospects in what could be a major turning point. Is this the end of Tesla’s golden age of growth — not to mention Musk’s fascinating life as a revered innovator and champion of a sustainable energy future?

Or, as Tesla fans contend, will the economic downturn actually increase the company’s lead over the rest of the electric vehicle world, bringing Musk one step closer to his goal of dominating a new automotive industry based on in EV?

Survival of the fittest

Although Musk’s Twitter digression has catalyzed Wall Street’s review of Tesla, there is little evidence that it has had a direct impact on vehicle sales.

Of the “over 1,000” people who bought Teslas last year from Octopus EV, a specialist electric rental company operating in the UK and US, only two customers switched to another brand over the Twitter issue, according to chief executive Fiona Howarth.

However, she adds that it is still notable, given the great brand loyalty the company has always enjoyed. A poll by Morning Consult found that between October and November, the share of American adults with a favorable view of Tesla fell by six percentage points. Among Democrats, who are more likely to be EV customers, it fell 20 points.

Joe Biden visits Detroit Auto Show to highlight US electric vehicle manufacturing. A decade after the launch of the Tesla Model S, the competition in the electric vehicle market has become serious © Kevin Lamarque/Reuters

Musk could hardly have tarnished his company’s brand at a worse time. Higher inflation and rising interest rates have combined to leave many potential customers worse off, while also increasing the cost of financing a new vehicle. This follows a series of price hikes Tesla made during the pandemic, as the cost of materials rose and abundant demand presented an opportunity to squeeze margins.

Higher prices and financing costs have pushed the average monthly car payment in the U.S. up by about a quarter over the past two years, to nearly $700, according to Adam Jonas, an analyst at Morgan Stanley. In a note to investors last month, Jonas warned that this would reduce demand for the entire EV sector, while also leaving Tesla facing a “deteriorating macro backdrop, record high unaffordability and increased competition.”

The effects are already visible. In the US and China, waiting lists for Tesla’s most popular cars, which ran for six months or more in early 2022, have all but disappeared. This week brought news that the company delivered just 405,278 new vehicles to customers in the final three months of last year, far short of the 500,000 some had hoped for by last September.

Meanwhile, a decade after the launch of the Tesla Model S, the competition in the electric car market is finally getting serious. As regulators in Europe and elsewhere prepare to crack down on sales of gasoline cars, global carmakers are increasingly rolling out cars designed to have broad appeal, rather than early models they needed just to sell. in limited numbers to achieve emissions targets.

Hyundai-Kia and other automakers have launched a series of widely praised electric vehicle models, causing Tesla’s market share to drop © SeongJoon Cho/Bloomberg

Volkswagen has poured billions into its system that supports models across the VW, Audi and Škoda ranges, while Hyundai-Kia has launched a series of widely praised models. Ford and General Motors have separately pledged to spend between $30 billion and $35 billion to develop new electric cars. Each of them has revealed a number of new models.

Tesla’s share of US electric vehicle sales fell to 65 percent in the first nine months of last year, from 79 percent in 2020, according to S&P Global Mobility. By 2025, that figure will be below 20 percent, S&P predicts. “It’s only natural that they won’t maintain this large market share they have in EVs” as rivals produce more competitive models, says Howarth at Octopus EV.

Struggling for a foothold among so many new entrants is likely to bring a period of competitive turmoil. “It’s not going to be easy,” says Carlos Tavares, chief executive of Stellantis, which added to the increasingly crowded field of electric trucks this week with the unveiling of an electric version of the Ram 1500. “The industry is in a Darwinian period. “

Lowering the price of electric vehicles will be essential, says Tavares. “Without affordability, the middle class won’t be able to join the club and then we won’t have enough volume impact to protect the planet.”

The Teslas are being transported near the company’s factory in Fremont, California. The automaker sees lower prices as potentially crucial to achieving Musk’s goal of 20 million car sales a year by 2030 © David Paul Morris/Bloomberg

Tesla faces similar pressure to cut costs — and prices — to meet its growth targets. After seeing the average selling price of its vehicles soar to $52,500 in the latest quarter — nearly $5,000 higher than a year ago — finding a way to lower prices to a true mass-market level could become key to achieving Musk’s ambitious sales target of 20 million vehicles per year by 2030.

“Musk is repeating over and over again that only a narrow segment of society can afford the Model 3,” says a major Tesla investor. “We’re going to need an electric vehicle that people can afford, and Tesla is in a very good position to do that.”

Tesla’s chief executive said on a call with Wall Street analysts last year that the company had begun thinking about how to build a new vehicle at a lower price, though he did not say how long it might take. come true.

Just another car manufacturer

What Tesla does next will help determine where its stock price ends up. Despite the decline, it still trades at around 28 times this year’s expected earnings – a huge premium to other carmakers.

A steeper revaluation of its stock is likely, veteran auto executive Bob Lutz says, as investors realize it doesn’t enjoy any distinct technological advantage to justify its valuation as a high-growth technology company.

A battery pack is displayed at Tesla’s factory near Sparks, Nevada. With the technology behind the vehicles widely available, some say Tesla will soon be seen as just one EV maker among many © Rich Pedroncelli/AP

Lutz, who once held senior roles at Ford, Chrysler and GM, credits Musk with “single-handedly bringing back a reputation for excellence in technical innovation to the American auto industry.”

But with the technology behind electric motors, lithium-ion batteries and control electronics widely available to other carmakers, he argues that Tesla is destined to be seen as just one carmaker among many. – at a much more modest stock market valuation.

However, Musk’s supporters say that understates the more enduring advantages the company has built in the decade since it launched the Model S.

The many technical advances it has made, from battery cell design and packaging to manufacturing techniques, to casting large parts of newer models in a single part to reduce the number of parts, have given it a clear cost advantage. says Pierre Ferragu, an analyst at New Street Research.

Tesla also has an industry-leading gross profit margin, he adds, which gives it a cushion to cut prices to maintain growth. Other automakers with thinner margins on EVs will have to cut back on capital investment, he argues, reducing competition.

If correct, this suggests that Tesla could emerge from a downturn in a stronger position relative to its competitors, setting it up for its next phase of growth. But for now, concerns that it is facing slower growth and will be forced to cut profits to support sales have Wall Street spooked.

For believers, there couldn’t be a better time to double down. Galileo Russell, a member of Tesla’s army of loyal personal investors, says that while he found the Twitter controversy “disappointing,” he is planning to add to his position in Tesla for the first time in more than three years.

Musk has been underestimated before, he says, and the current deterioration on Wall Street is no different. “The media likes to think that Elon is canceled and that will destroy Tesla,” he says. “But the silent majority still supports it.”

Additional reporting by Harriet Agnew