Ever the trickster, Elon Musk joked this week that screwdrivers and drills are now allowed on all Boeing flights so passengers can help keep the plane from falling apart.
However, fate loves irony, as the tycoon likes to say, because the gears also come from his own equity story. The only company in the S&P 500 whose shares have performed worse than the scandal-plagued plane maker this year is Tesla. It has fallen more than 30% since January, to a level not seen since last May.
Musk now faces growing concerns that his electric vehicle company, relegated to second place behind BYD, may deliver quarterly results that fail to show sales or profits are rising. Thanks to a series of sharp price reductions, last year he managed to purchase the former at the expense of the latter.
—Elon Musk (@elonmusk) March 17, 2024
That may well change now that volumes are also expected to stall even when compared to the very low level of last year’s first quarter, when it sold just 423,000 vehicles. Tesla investors normally expect sequential volume improvement: tepid year-over-year growth would be a major disappointment given that annual increases have reached 83% in recent quarters.
If Tesla can only manage a low single-digit increase in the first quarter of 2023, Tesla risks becoming a growth minus growth stock — a toxic combination that could result in a severe multiple squeeze as fewer investors are willing to pay 60 times the useful for owning a company mired in stagnation.
“The impact of price cuts is surprisingly low at this point,” Wells Fargo analyst Colin Langan told CNBC after shocking markets by downgrading Tesla to sell on predictions that annual sales volumes would remain stable this year to about 1.8 million. Automobiles.
Tesla appeared to confirm those fears when last week it warned buyers to order their new $43,990 Model Y before the end of the quarter or be hit by a $1,000 price increase taking effect in April. “Order in 2 minutes,” its official account urged, directing readers to the vehicle setup site.
Far from signaling an increase in demand, it was rather a ploy to push volumes before the end of the quarter, while providing an excuse should sales fall sharply over the next three months.
Until now the company knew only one direction: growth
“Tesla is trying to increase demand with this FOMO (fear of missing out) strategy” he wrote sales tracker Troy Teslike, who has been at the forefront of predicting weak demand in the first quarter. “The message is that buyers should buy now to get the cheapest $1,000 price.”
The exhortation came just as rules went into effect in January allowing consumers to take immediate advantage of U.S. federal EV tax credits at the point of sale, rather than waiting to eventually be reimbursed on their tax returns.
Meanwhile, unnamed sources told Bloomberg on Friday that Tesla was cutting production at Shanghai, its largest and most profitable plant, by nearly a third this month due to weakening demand.
Prices in the United States will increase by $1,000 for all Model Y trims starting April 1
Order in 2 minutes via https://t.co/oLrTGTu522
— Tesla North America (@tesla_na) March 16, 2024
The reason this is so devastating is that, since the rise of the Model Y in early 2020, the company has only ever known one direction: up.
Aside from government-imposed pandemic lockdowns, each quarter has always been better than the previous one with only one brief exception, and that was due to factory upgrades. Even during the chip crisis, Tesla was busy producing more cars while others were forced to mothball their factories.
This like-clock reliability in producing exponential sales growth despite adversity is why the company earned its rich valuation in the first place.
Even longtime Tesla bulls are leaving, at least temporarily. Kevin Paffrath, who runs the exchange-traded fund Pricing Power, sold all 36,840 shares of the company last week and is now actively shorting it.
For now, the market continues to give Musk the benefit of the doubt, at least until Tesla releases first-quarter production, deliveries and earnings in April.
“The bear case hinges on the multiple crash, which could require a significantly worse outcome than our base case,” UBS analyst Joseph Spak wrote last week after cutting his first-quarter delivery forecast to 432,000 vehicles, reducing meanwhile the earnings estimate for the full year. .
Three levers to use for profitable growth
Automakers make their profits through three key levers. The first is pricing, as slow vehicles need corrosive discounts and incentives before a customer will take one off the lot, while in-demand newer models can command a premium.
The second is mix: sell large models better suited to popular body styles like SUVs and pickups in richer countries, and you’ll generally be better off than if you relied on compact sedans and hatchbacks in poorer ones.
WELL…
No updated Model 3 for me. This offer is too low 🤣 pic.twitter.com/Xd7ZgfCXYg
— Ethan (@EZebroni) March 19, 2024
Finally and above all there are the volumes. Since nearly all automakers operate their own factories, they must constantly pump out cars to turn a profit. Whether a factory operates at 80% or just 60% can mean the difference between a solid profit and a substantial loss.
Tesla’s problem is that mix and pricing will likely be negative, meaning it will have to rely on volume growth to fuel first-quarter profits, and here consensus EPS estimates have steadily fallen.
The price cuts have infuriated existing owners and burned out fleet buyers
Part of that can be attributed to about three weeks of lost production at Tesla’s German plant, which could cost as many as 18,000 vehicles. But Tesla’s most recent data shows that the company entered this year overall with a 16-day supply, so it has an existing inventory buffer.
It increasingly appears that Musk’s strategy, which seemingly worked so brilliantly last year, of cutting prices to maintain growth, may have ultimately backfired. He not only trained customers to wait in hopes of getting a better deal, but he also infuriated many existing ones.
Rental agencies Hertz and Sixt have both been burned by the collapse in the value of their cars in the used car market (one CEO even lost his job), while Salesforce rival SAP has dropped Tesla from its list of brands eligible for its fleet of company cars.
“They were abandoned from the corporate fleet market because their discounting strategy caused resale prices to collapse completely,” says Matthias Schmidt, a Europe-based electric vehicle analyst. “This should be part of their expansion strategy, but they have burned their bridges.”
In other words, Musk needs to spend less time trolling Boeing and more time figuring out how to reignite its roaring growth engines.