On Oct. 25, the Nasdaq Composite suffered its worst daily decline since Feb. 21, led by a 9.5% slide in Google parent company Alphabet (GOOG 1.86%) (GOOGL 2.00%), a 5.6% decline in Amazon (AMZN 1.00%), and declines of over 4% in Nvidia (NVDA 1.77%) and Meta Platforms (META 1.59%).
Nvidia, Meta Platforms, and Tesla (TSLA 2.54%) have been three of the five best-performing S&P 500 stocks so far this year. But Tesla stock fell hard after its Q3 earnings disappointed investors. Still up big on the year, is Tesla stock due for a further correction, or should investors consider buying the dip on the electric car stock?
Image source: Getty Images.
Fears coming to fruition
Tesla stock finished 2022 down 65% and hovering around $123 per share. A big reason for the sell-off was an epic multiyear run in the stock leading up to 2022. But it also happened due to fears of an industrywide downturn and of harm to its margins and demand for its vehicles during a period of prolonged high interest rates.
Those fears have partially come true. In 2022, Tesla produced 1.37 million cars and delivered 1.31 million. On its Q4 2022 earnings call, Tesla CEO Elon Musk guided for 2023 production of 1.8 million vehicles but remained optimistic the figure could be closer to 2 million.
In its Q3 2023 investor presentation, Tesla said it is on track to produce over 1.8 million vehicles. So despite a slew of headwinds, Tesla deserves credit for remaining on track to reach an ambitious goal, albeit at the low end.
|
Metric |
Q3 2023 |
Q2 2023 |
Q1 2023 |
Q4 2022 |
Q3 2022 |
Q2 2022 |
Q1 2022 |
|---|---|---|---|---|---|---|---|
|
Production |
430,488 |
479,700 |
440,808 |
439,701 |
365,923 |
258,580 |
305,407 |
|
Deliveries |
435,059 |
466,140 |
422,875 |
405,278 |
343,830 |
254,695 |
310,048 |
Data source: Tesla.
To reach its 1.8 million goal, Tesla will need to produce just over 449,000 cars in Q4 2023. Q3 figures already came in lower than Q2's. 449,000 cars in Q4 would still make Q2 2023 the record quarter. What's more, it would show barely any year-over-year growth compared to Q4 2022's production of 439,701 cars.
Production is just one side of the equation. To get cars off the lot and into customers' hands, Tesla has been relying on steep price cuts. The price cuts have taken a major toll on Tesla's operating margin, which came in at just 7.6% for the quarter. For context, consider that Tesla's operating margin was 17.2% in Q3 2022.
TSLA Operating Margin (Quarterly) data by YCharts
Tesla now finds itself with a lower margin than many of its peers, which is the exact opposite of where Tesla had been over the last few years.
In sum, Tesla is barely on track to hit its 2023 production goal. It is facing sharp declines in production and delivery growth rates. And without price cuts, Tesla could have missed the goal and faced built-up inventory numbers and a discrepancy between production and deliveries.
NASDAQ: TSLA
Key Data Points
Mounting concerns
To Tesla's credit, price cuts were probably the way to go. The company's long-term goal to grow production at a 50% compound annual growth rate (CAGR) hinges on moving cars off the line and using profits to reinvest in the business and boost manufacturing capacity. The aggressive business model has been a home run so far for Tesla and its shareholders. But the plan leaves Tesla vulnerable to the economic cycle. It also leaves Tesla vulnerable to competition, which has gotten fiercer in recent years. It has to contend with both pure-play EV companies out of China and legacy automakers.
Tesla is going to have a hard time restoring and then maintaining its margins, not to mention investing in other aspects of its business, if the economy remains weak and Tesla has to artificially boost demand through price cuts. A 50% production CAGR banks on higher demand, demand that may not be able to match Tesla's desired growth rate due in the short term to the economy and in the longer term to competition.
What Tesla has going for it
Despite all of these challenges, Tesla has a lot of advantages over its peers. First off, it is an established, industry-leading, profitable, pure-play American EV company. Secondly, it has an impeccable balance sheet and isn't reliant on debt to run its business.
The same can't be said for legacy automakers that are losing money on their EV projects or pure-play EV companies that are dependent on capital markets to fund their unprofitable operations. For these reasons, If EV demand as a whole slows, Tesla will probably fare better than its peers.
A less compelling buy
Tesla remains a foundational EV stock with tons of upside potential. But it just isn't as juicy a buy as it was when it was down big last year.
Many of the concerns that sent the stock down last fall have come true. And the margin compression is arguably worse than feared. Yet the stock is up 67% this year. Tesla's rapid recovery may be getting ahead of itself. And for that reason, investors may want to brace for volatility or take a wait-and-see approach to the stock.
