Tesla (TSLA -2.33%) has dazzled the market over much of its recent history, first overcoming doubts by turning profitable and then by scaling up production to make it one of the biggest companies in the U.S. by revenue. The electric vehicle (EV) maker is now expected to top $100 billion in sales next year -- not bad for a company many thought would go bankrupt just a few years ago.
Along the way to becoming one of the most valuable companies in the U.S., Tesla made a core promise to investors in early 2021, saying it would grow production by a compound annual growth rate (CAGR) that averaged 50% over a multiyear horizon.
That's clearly a bold goal, and Tesla CEO Elon Musk's ability to think big and execute on his vision is part of what's made him and his company so successful. Since it announced that goal, Tesla has met it. It grew production from 510,000 in 2020 to 930,000 in 2021 as it ramped up production at its Shanghai plant. It then grew that figure by approximately 50% in 2022 to reach 1.37 million, and it's expected to finish 2023 with 1.8 million cars made, representing 31% growth.
Starting from 2020, Tesla is actually ahead of its goal, as it would have reached 1.72 million cars this year if it had grown the total by 50% each year. However, a number of signs are emerging showing that Tesla's run of 50% compound annual growth could be coming to an end, and Musk seemed to admit as much on the recent earnings call.
Image source: Tesla.
Trouble with the growth curve
In its outlook in its third-quarter earnings report, Tesla said, "We are planning to grow production as quickly as possible in alignment with the 50% CAGR target we began guiding to in early 2021."
However, on the earnings call, Musk seemed unwilling to stand by that growth target for next year. For example, one analyst pointed out that the Wall Street consensus calls for the company to deliver 2.3 million vehicles next year, representing 28% growth from 2023 guidance, and asked whether that growth rate was achievable without any mass market launches. They also asked when the company expects to return the 50% long-term CAGR.
Musk responded dismissively, saying, "Yeah. I mean, at the risk of stating the obvious, it's not possible to have a compound growth rate of 50% forever or you will exceed the mass of the known universe. He also added, "But I think we will grow very rapidly, much faster than any other car company on Earth, by far."
Separately, Musk said the company was hitting a "law of large numbers situation" with its production of the Model Y, which is on the verge of becoming the world's No. 1 car by units sold.
However, Tesla is far from the biggest car manufacturer in the world as Toyota made 10.5 million vehicles last year, making the "law of large numbers" comment sound like more of an excuse than a real argument.
The writing on the wall
On a sequential basis, Tesla's production has been flat over the last four quarters. In fact, production in the third quarter was at its lowest in the last four quarters, though the company blamed factory downtime for those results. Its guidance also implies similar production in the fourth quarter, meaning production will be essentially flat on a year-over-year basis.
The company expects to begin delivering its Cybertrucks by the end of the year, though Musk commented on production challenges on the earnings call. Additionally, he said the company was taking a measured pace with the construction of its Mexican factory due to pressure from higher interest rates and the broader macroeconomic environment.
Tesla is expected to ramp up production at its Berlin and Austin factories, but that doesn't seem to be enough to achieve the 50% growth target. Meanwhile, signs of slowing demand have become rife in the EV industry, and Tesla can't escape those industry trends. In fact, that's one reason the company has lowered prices so many times this year.
We should get guidance in the fourth quarter for 2024 production, but it's likely to be below the 50% mark, and Tesla seems set to struggle to get back there. The company may outgrow other carmakers its size, but its days of hypergrowth seem like they're past. Any cut to that long-term guidance is likely to send the stock spiraling.
