The future of Tesla’s stock took a hit on Wednesday, leaving investors pondering the reasons behind the slump. As it turns out, it could be a combination of market factors and events at the Munich auto show that may have triggered the decline.
Deutsche Bank analyst Emmanuel Rosner recently had a meeting with Tesla management during a conference tied to the IAA Mobility event in Munich. The outcomes of the discussion were a mix of good news and bad news.
On the negative side, Rosner expressed concerns about possible disappointment in terms of deliveries and profit margins for the third quarter. Tesla had scheduled some production downtime during this period, which could potentially limit the number of deliveries made. Additionally, the decline in raw material costs that benefited Tesla earlier this year primarily impacted the company’s second-quarter results, leaving little room for further cost reductions.
At present, Wall Street estimates anticipate around 470,000 car deliveries in the third quarter, with operating profit margins of about 10%. This comes after Tesla sold roughly 466,000 vehicles in the second quarter, with operating profit margins around 9.6% – a decrease compared to the nearly 15% margin achieved in the second quarter of last year.
One contributing factor to the declining profit margins has been the aggressive price cuts implemented by Tesla, particularly at the beginning of 2023. Although these moves aimed to boost sales volume, they raised concerns among investors about profitability. In fact, Tesla’s stock dropped nearly 10% following the announcement of second-quarter results in July, largely due to remarks made by CEO Elon Musk indicating a prioritization of sales growth over profitability.
Despite these challenges, Tesla remains a prominent player in the electric vehicle market. However, investors will be closely monitoring the developments in order to assess the company’s ability to navigate these obstacles while maintaining its competitive edge.
Musk’s Long-Term Bet on Tesla’s Growth
Elon Musk, the visionary CEO of Tesla, has set his sights on a long-term strategy to propel the company’s growth. His unconventional approach prioritizes having more Tesla vehicles on the road, rather than selling fewer vehicles at higher prices. Musk firmly believes that this strategy will pay off, as Tesla’s autonomous-driving software is expected to generate recurring sales through subscriptions for the entire fleet of Tesla vehicles. The logic is simple: more vehicles mean more software sales.
However, autonomous driving is not the sole driving force behind Tesla’s growth plans. Analyst Adam Rosner highlights Tesla’s optimism regarding the upcoming Cybertruck, scheduled for delivery in the fourth quarter. Additionally, the updated Model 3 sedan is anticipated to generate increased sales due to its new features.
Undoubtedly, Tesla’s next-generation vehicle platform takes center stage as its highest priority and biggest potential for growth. With the potential to produce over 5 million vehicles annually worldwide, this innovative platform could pave the way for a smaller, more affordable Tesla model.
By 2023, Tesla is projected to deliver approximately 1.8 million cars, with this number expected to rise to about 2.3 million by 2024. These figures primarily stem from the vehicle platform shared by both the Model 3 and Model Y cars. To further amplify growth, an additional demand of 5 million units would be a significant leap forward.
Adam Rosner rates Tesla shares as a Buy and sets a price target of $300, while the average analyst rating hovers around $254. It is worth noting that only 39% of analysts covering the company rate its shares as Buy, a stark contrast to the average of approximately 55% for stocks listed on the S&P 500.
On Wednesday, Tesla stock saw a decline of 1.8%, closing at $251.37. Meanwhile, the S&P 500 and Nasdaq Composite experienced decreases of 0.7% and 0.1.1%, respectively.