There aren't too many company-specific events that draw the attention of everyday and professional investors quite like electric-vehicle (EV) manufacturer Tesla's (TSLA -1.92%) annual shareholder meeting. Getting to hear CEO Elon Musk discuss Tesla's progress and what innovations can shape the future is the type of stuff that excites Wall Street and growth-seeking investors.
The reason Musk and his company are given so much credence on Wall Street is because Tesla has been able to do something that no other automaker has done in more than a half-century: successfully build itself from the ground up to mass production. Although this production ramp has cost a pretty penny, Tesla looks to be on track to produce 1.8 million EVs in 2023.
Furthermore, Tesla has been profitable, based on generally accepted accounting principles (GAAP), in each of the past three years. Meanwhile, the EV divisions of virtually every new and legacy automaker are deeply in the red.
The Tesla Cybertruck should begin production later this year. Image source: Tesla.
Elon Musk puts a huge rumor to bed
While Tesla's annual meeting gave existing shareholders plenty to look forward to, such as the start of production on the Cybertruck later this year, as well as the announcement that Tesla intends to produce a new drive unit that'll require less silicon carbide, it's what Musk said during the question-and-answer session that might have left shareholders less-than-pleased.
A member of the audience asked Tesla's chief the following:
Earlier this year, you cut prices on everything 15%-20%. More recently, you've been raising prices on Model Y, Model S, and Model X. Could you just talk about the pricing strategy on Model Y going forward -- keep it separate from the decision to bring out the next-gen vehicles that we all agree is going to blow the doors off on volume. But just on Model Y, it's the best-selling product in the world, can you just talk about the strategy of pricing going forward on that?
Musk's response to this question was lengthy and described how Tesla's pricing strategy differs from traditional automakers. In particular, he emphasized how Tesla doesn't use intermediaries to sell its vehicles, which makes its pricing strategy more transparent than vehicles you'd see on dealership lots.
But it was the initial response to this audience members' question that may not sit well with shareholders. Said Musk,
I mean it's pretty straightforward. I mean, we see what the demand is, and then we adjust pricing to meet the demand.
The speculation among optimists had been that Tesla was reducing prices in the U.S., Asia, and Europe to account for its improved production efficiencies and to steal share from its competition. One of the core Tesla investment theses is that scaling output, refining the production process, and continuing to innovate, will drive the per-cost vehicle down and make its EVs affordable for consumers around the world.
However, Musk's comments put this rumor to bed. He very clearly and directly states that Tesla's half-dozen price cuts in the U.S. since the beginning of the year are tied to demand. If prices are coming down, it's a signal that demand for Tesla's EVs isn't as strong as expected.
Furthermore, inventory levels for Tesla have been rising throughout the year. Four weeks ago, InsideEvs.com noted that Tesla's new U.S. inventory hit an all-time high. That's not good news after slashing prices a cumulative 15% to 20% in four months.
Image source: Getty Images.
Pricing is just one potential concern for Tesla's shareholders
But as I've pointed out recently, pricing concerns represent just one of the many challenges facing Tesla. Although the company is profitable and well-capitalized, it's set to face a mountain of headwinds in the coming quarters.
One of the biggest potential concerns for Tesla is the growing expectation that an economic downturn will take shape. Multiple indicators and metrics have suggested that a U.S. recession is likely. Meanwhile, the minutes from the Federal Open Market Committee's March meeting show the central bank has modeled a mild recession into its outlook for later this year.
The auto industry is highly cyclical, which means it thrives when the U.S. economy is expanding and struggles when economic activity contracts. If Tesla is already seeing its new-vehicle inventory climb to record levels in the U.S. prior to a recession, it's worrisome to think what might happen to pricing and automotive gross margin if a U.S. recession does materialize in the second-half of 2023.
To further flesh out this point, Tesla has been commanding a premium price-to-earnings (P/E) ratio for years. As of this past week, investors were paying close to 50 times forecast earnings in 2023.
TSLA PE Ratio (Forward) data by YCharts.
While this is a P/E ratio that could make sense for a supercharged growth stock that isn't highly cyclical, it makes absolutely no sense for an auto stock. Not only do auto stocks typically trade at single-digit P/E ratios, but all of Tesla's attempts to generate profits outside of selling and leasing EVs have thus far failed. As nothing more than an auto company, a P/E of 50 during a possible economic downturn can't be justified.
However, I've long felt the biggest risk for Tesla continues to be Elon Musk. Despite being a visionary, Musk brings legal and operating liabilities to the table that are more distraction than help for his company. In August 2022, I discussed some of the ways Tesla's chief has drawn the ire of securities regulators.
What's more, Musk has promised a vast sea of new innovations and technologies, many of which are baked into Tesla's valuation. The problem is that many of these innovations and technologies are eventually delayed or get scrapped altogether. Examples include fully autonomous driving (i.e., Level 5 full self-driving) being pushed back year after year, as well as Musk failing to put 1 million autonomous robotaxis on our roads, as was promised years ago.
Tesla has an extensive track record of proving pessimists wrong. But with clear-cut evidence of waning demand vis-à-vis Musk's comments on Tesla's pricing activity, the bears may be sitting pretty.
