2023 has been another roller-coaster ride for owners of Tesla (TSLA -1.11%) stock. Earlier this year (July actually), it was trading at $299. But the stock is on a downhill ride at the moment as the company reported a disappointing quarterly result last week. That sent its stock down by another 15% in less than a week to $212 (as of this writing).
Clearly, Tesla's stock price is going through a bit of a correction, and there is no immediate catalyst to offset the downward momentum. Worse, the downside risks have been building up over the last few months. In fact, there are indications the situation could deteriorate further.
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There are signs of cracks in Tesla's financials
Tesla has been the undisputed winner of the movement toward electric vehicles in the last few years, with annual vehicle deliveries surging more than fivefold from 245,506 in 2018 to 1,313,851 in 2022. While the company aims to maintain its strong production growth in 2023, there are early signs that 2023 could be challenging.
A newly reported figure that matters here is the quarter-over-quarter decline in Tesla's car deliveries, which went from 466,140 to 435,059. This is the first time in the past few quarters that Tesla has reported declining deliveries. While the fall in production (attributed to factory upgrades) might have contributed partly to the company's weak performance, another critical factor was weaker customer demand for Tesla's cars.
The fall in sales volume looks even worse if you consider that Tesla reduced its selling price in the last few quarters. The price reduction resulted in a gap between revenue growth (up 9% year over year) and volume growth (up 27% year over year). Other financial metrics also worsened, with gross profit falling 22% year over year amid the contraction of gross margin from 25.1% to 17.9%, operating profit plunging by 52%, and free cash flow contracting by 74%.
Tesla's disappointing financial performance raises questions about its near-term sales prospects and the effectiveness of the company's price-cut strategy in gaining volume and market share. While the car manufacturer reiterated its goal to grow volume to 1.8 million in 2023, investors are getting more concerned about its ability to deliver that target, especially in an increasingly challenging environment (more on this in the next section).
The macro environment is worsening
Like all automakers, Tesla is not immune to the change in the macro environment. Factors like high inflation, high interest rates, and economic downturns will impact customers' sentiment and their ability to get loans to buy high-value products like cars.
Unfortunately for Tesla, the external economic environment has gone from bad to worse over the last few quarters. Various political and military conflicts around the globe, persistently elevated inflation, rising interest rates, and the increasing costs of parts and labor have all negatively affected its business.
So far, Tesla has performed reasonably well despite these challenges. For instance, while the latest quarterly sales volume fell quarter over quarter, it is still 27% higher year over year.
But if the broader economy remains challenging (or worsens), there is a good chance that Tesla's performance will be further affected. After all, consumers will likely defer their high-ticket purchases during these uncertain times. Even if they are willing to spend, they may not qualify for a loan, or the borrowing cost may be unreasonably high. These adverse developments could severely impact Tesla's sales volume and financial performance in the next few quarters.
What it means for Tesla investors
In short, Tesla is likely to have a tough time in the coming quarters.
Fortunately, a silver lining for Tesla is its solid balance sheet with $26 billion in cash, cash equivalents, and investments. Tesla's overall debt remains low at $3.7 billion. Its stable financial position gives it enough cushion to go through the challenging time ahead.
Still, investors need to be prepared for a more challenging time ahead for Tesla. Worse, it is probably just the beginning of the challenges.
