Tesla faces a $94 billion reality check as the electric vehicle industry encounters challenging times.

Tesla faces a $94 billion reality check as the electric vehicle industry encounters challenging times.

Tesla Inc. enjoyed a stellar 2023, witnessing a more than doubling of its shares in the past year. However, the beginning of 2024 tells a different story, marking the electric vehicle giant's worst start to any year.

In the initial two weeks of 2024, Tesla has suffered a staggering loss of over $94 billion in market valuation. The downturn can be attributed to a series of negative developments, including Hertz Global Holdings Inc.'s reversal on EVs, further price reductions for Chinese-made cars, and indications of escalating labor costs. This challenging landscape is unfolding against the backdrop of a slowdown in EV demand, particularly in the U.S.

Investor anxiety is primarily centered around Tesla's stagnant growth, with concerns heightened by the price cuts in China, suggesting a competitive race to the bottom in the EV industry. The impact on Tesla's market capitalization at the start of the year is the most significant downturn since its IPO in 2010. In terms of percentage, Tesla's 12% decline since January mirrors its worst performance since 2016.

Compounding the challenges, prospects for an immediate turnaround for Tesla appear grim. Aggressive price reductions since early 2023 aimed at stimulating demand have eroded the company's once-robust profit margin. Tesla's automotive gross margin, excluding regulatory credits, dropped to 16.3% in the third quarter from 27.9% a year earlier. The situation intensifies as U.S. plant production workers at Tesla receive pay raises.
Tesla initially signaled the slowdown in electric vehicle (EV) demand in its October third-quarter earnings report, prompting a global chorus of pessimistic forecasts from other automakers and suppliers. Despite Tesla's fourth-quarter delivery numbers surpassing analysts' expectations, it trailed China's BYD Co. in global electric-car sales, leading to a stark contrast for Tesla investors. While the stock was among the top performers in the S&P 500 last year, it now ranks among the worst in the early days of 2024.

Elon Musk, the world's wealthiest individual, who witnessed unparalleled wealth growth in 2023, has seen his net worth decline by $23 billion in the new year. Musk, who reclaimed the top spot on Bloomberg's wealth index, is facing competition from Jeff Bezos, with the latter rapidly closing in on Musk's fortune.

Despite the recent setbacks, Tesla remains a pivotal player in the shift from gas-powered to electric vehicles globally. Its significant lead over potential rivals, such as BYD, is evident in revenue and profits, even though BYD has surpassed Tesla in units sold. Notably, Tesla's dominance in the U.S. market sets it apart, as BYD doesn't sell cars in the U.S.

However, Tesla's past success has its drawbacks. Its soaring market capitalization, fueled by investor optimism, leaves the company susceptible to significant market reactions to adverse news. Many Tesla supporters argue against comparing it to traditional car companies, emphasizing its future value in developing the first truly self-driving vehicles. Yet, the challenge lies in Tesla's struggle to deliver on promises of fully autonomous driving and AI, which are already factored into its valuation.

In the eyes of some experts, being viewed merely as another automotive manufacturer falls short of justifying Tesla's $750 billion valuation. The company's aspirations for fully autonomous driving and AI, despite promises made for years, still face skepticism from most experts who believe the technology is years, if not decades, away.

The article concludes by highlighting that Tesla's valuation is contingent on delivering on its promises and meeting the high  expectations set by its past success.

"We are witnessing a cyclical downturn for EVs, but competitive dynamics are exacerbating the cyclical pressures," remarked Ivana Delevska, Chief Investment Officer at Spear Invest. The combination of price cuts and declining margins reflects the challenging competitive landscape.

Adding to the challenges, Tesla faces disruptions in shipments to its Berlin plant due to Western military actions and security concerns in the Red Sea. Consequently, production at the Berlin plant is set to be suspended from Jan. 29 to Feb. 11.

 

The article excerpted from Yahoo Finance.

 

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