Tesla this week reported its first quarter of year-over-year sales declines since 2020. A poor quarter was expected given slowing demand in China Arson at its factory in Germany, which led to a production stop and delivery bottlenecks resulting from the geopolitical situation within the Red Sea. But Tesla ultimately disenchanted even these low expectations. Wedbush analyst and noted Tesla bull Dan Ives called it an “absolute disaster that is difficult to explain.”
Now that Tesla supporters like Ives have so clearly condemned the corporate after its discouraging report, it’s many short sellers And the critics feel more confirmed than ever of their claim that the corporate was overpriced from the beginning.
“This was really the beginning of the end of the Tesla bubble, which was probably and arguably the largest stock market bubble in modern history,” said Per Lekander, managing partner of London-based investment firm Clean Energy Transition CNBC.
Tesla’s share price has fallen 58% since its peak in November 2021 – and sales are declining. Last quarter, Tesla reported one Decline in vehicle deliveries by 8.5% from last yr. Wall Street set the bar relatively low – 457,000 – but Tesla was only capable of deliver a complete of 386,810 vehicles. There were even rumors that it will fall wanting those mediocre expectations, but to not this extent. The most pessimistic analysts had forecast around 414,000 deliveries for the quarter.
According to Lekander, these numbers represent a big turnaround from Tesla’s growth trajectory over the past few years, and given Tesla’s business model, they might only worsen from here. For years, Tesla invested heavily in constructing the crucial production capability to satisfy demand for electric vehicles that it believed it couldn’t meet. But given declining vehicle deliveries, this decision appears riskier than ever.
“I actually think the company could go bankrupt,” Lekander said.
This is the primary quarter Tesla has posted annual declines since 2020, when the pandemic shut down factory operations. Since then, Tesla’s sales growth has been disastrous, appearing to be evidence that the broader consumer was ready for electric vehicles and that Tesla’s unorthodox production methods had paid off. In 2023, the corporate ended the yr with revenue of $96 billion, up 207% from 2020. This level of sustainable sales growth was taken under consideration within the Tesla share price and drove it ever higher – not least because Tesla was launched firstly of 2021 told Investors expected to “achieve 50% compound annual growth in vehicle shipments.”
But now that sales haven’t only fallen but reversed, the logic underlying that investment thesis is evaporating. To make matters worse, Lekander says Tesla’s vertically integrated business model is barely suitable for a corporation that expects rapid growth. “It’s a brilliant model when you’re growing because the working capital is negative, so you’re actually getting paid for the growth and taking all the margin,” he said CNBC.
Lekander is referring to the concept that an organization growing as quickly as Tesla – the past tense is vital here – can use all the cash it makes from selling its cars to repeatedly fund its expansion. As long as sales proceed to grow, an organization has enough money to proceed investing in things like latest factories or product improvements. However, as sales decline, an organization must use less and fewer money to repay the debt it incurred to finance those expenses. Essentially, it now faces mounting debts and declining revenues: a dangerous situation for any company, especially in Azerbaijan competitive a market like electric vehicles.
“The problem is that if you go the other way and sales are down, you have all the fixed costs that you have to spread over a smaller volume and you’re unwinding negative working capital,” Lekander said.
Under Musk’s leadership, Tesla has developed right into a automobile company of outstanding quality vertical integration. The company invested not only in the development of the cars themselves, but in addition in charging networksand in efforts to supply batteries for electric vehicles in the home. In theory, this could create a producing process that permits faster innovation because Tesla could be less depending on other suppliers.
In addition to producing the cars themselves, Tesla also decided to develop its own software programs right from the beginning. The hope was that these programs could be used to power self-driving technology in the long run. In fact, Musk once memorably called Tesla a software company. “Tesla is as much a software company as it is a hardware company, both automotive and factory,” he said Posted on X in February 2022. “This is not widely understood.”
In order for Tesla to implement its strategy of vertical integration and operating with negative working capital (i.e., its liabilities exceed its assets), the corporate must know that demand for its products exists even when its own supply isn’t there. This was the case at Tesla for a very long time. Its products attracted a loyal following, largely because they were hailed as the primary “cool” electric vehicle – Tesla’s Model S didn’t look goofy, and didn’t acceleration of a sports automobile.
However, Lekander now asks himself whether this demand actually exists – and attributes the weak figures of the last quarter to not the production problems mentioned by Tesla, but to the falling demand for its products.
“How do record high inventory levels coincide with a production problem?” Lekandar asked rhetorically. “It’s a demand problem.”
In an analyst note published earlier this week, UBS got here to the same conclusion. “We believe demand is weakening,” wrote analyst Joseph Spak.
Much of this demand is slowing as other electric vehicles enter the market, making the market way more competitive. In particular, several Chinese firms are making cheaper models, which has hurt Tesla’s business on the earth’s second-largest economy. There can also be the issue that there are still many mainstream automobile buyers lukewarm on electric vehicles. This problem has been exacerbated by the undeniable fact that most EV early adopters already own an electrical automobile and don’t need a brand new one.
To drive demand, Tesla is betting heavily on its autonomous driving capabilities. Even though the technology is not fully developed yet, that hasn’t stopped Musk from signing up latest customers Get a demo the updated software for self-driving cars. Tesla can also be offering one month of free use of its driver assistance technology, which otherwise costs $199 per 30 days.
