Tesla (TSLA -1.11%) stock peaked at more than $400 in 2021, which valued the company north of $1 trillion. But it has since plunged 52% from that high point amid a series of economic headwinds like high inflation and rising interest rates, which have forced consumers to tighten their belts.
The electric vehicle (EV) industry is also slowly maturing, and Tesla is no longer the disruptive start-up it once was; it now sells millions of cars each year, which means it can't grow as quickly as it did in the past. Plus, the company faces competitive threats from new EV companies and legacy automakers all over the world.
Tesla just reported its financial results for the fourth quarter of 2023 (ended Dec. 31), and they fell short of Wall Street's expectations. The company's forward guidance suggests 2024 could be the toughest year in the company's history in terms of growth. So, can Tesla reclaim its former glory and rejoin the $1 trillion club this year?
Electric vehicle demand appears to be slowing, while competition is rising
Tesla sold 1.2 million Model Y EVs during 2023, making it the best-selling car of the year in all categories. Tesla sold over 1.8 million EVs overall, which was slightly above its prior forecast, but it wasn't enough to maintain its title as the world's largest EV manufacturer -- in Q4, China-based BYD outsold the company for the first time.
Growing competition was a common theme in 2023. Legacy automakers like Ford Motor Company and General Motors ramped up production of EVs, as did smaller start-ups like Rivian Automotive. All the while, sales growth across the industry appears to be slowing.
EVs sell at a higher price point than cars powered by internal combustion engines (ICEs), so the economic headwinds I touched on earlier might be a factor. Nonetheless, manufacturers are worried; near the end of last year, Ford announced it will postpone $12 billion worth of investments into its EV segment citing soft demand, and just last week it cut production of its F-150 Lightning. Similarly, GM abandoned its goal to produce 400,000 EVs in 2024, and it also exited a $5 billion EV partnership with Honda Motor.
Tesla also spent most of 2023 slashing prices. By December, the average price of a new Tesla was down a whopping 25.1% year over year (according to Cox Automotive), so while the company slightly exceeded its sales forecast, it came at a significant cost, which I'll discuss in a moment. The reductions have continued in 2024, with Tesla cutting prices in China and Europe already.
Tesla's Q4 2023 financial results and forward guidance missed expectations
Wall Street analysts expected Tesla to deliver $25.6 billion in revenue for the fourth quarter of 2023, but the price cuts had a larger impact than anticipated, so revenue came in at just $25.2 billion. Full-year revenue for 2023 was a record-high $96.7 billion, but it also fell short of the Street's estimate.
But investors were more focused on Tesla's gross profit margin. It has routinely been the highest in the industry, however, it has steadily declined from its peak of 29.1% in mid-2022 on the back of the price cuts. It came in at just 17.6% in Q4 2023, which had a negative impact on Tesla's profitability.
While Tesla's net income (profit) appeared to double in Q4 to $7.9 billion, it was mostly due to a one-time noncash tax benefit worth $5.9 billion. Excluding that, Tesla's net income actually came in at $2.5 billion, which was a drop of 39% year over year.
Tesla didn't release a specific sales forecast with its earnings report, which is unusual. It simply said growth would be notably lower in 2024 than it was in 2023. Some analysts believe that will translate to vehicle deliveries of around 2.2 million units, representing a year-over-year increase of just 22%.
But here's the good news
CEO Elon Musk told investors there are many people who want to buy a Tesla but simply can't afford it, not only because of the high sticker price but also because of high interest rates. As a result, Tesla will start production on a whole new car in 2025 that will sell at a much lower price point, and Musk believes that will ignite a new wave of growth.
But Tesla is more than just a car manufacturer. It just released a new beta version (called V12) of its fully autonomous self-driving software, which replaces hundreds of thousands of lines of computer code with artificial intelligence (AI) neural networks. This could finally pave the way for a widespread release, and it could transform the company's economics and potentially even generate more revenue than actual car sales in the long run.
Then there is Optimus, Tesla's AI-powered humanoid robot. The company has revealed several impressive demonstrations of its capabilities, and Musk says it could start shipping as soon as next year. He believes Optimus could eventually create more value than everything else at Tesla combined, likely because it will have such broad applications from manufacturing to serving as an everyday assistant.
Finally, Tesla installed almost 15 gigawatt-hours (GWh) of battery storage during 2023, a 125% increase compared to 2022. The company is ramping up production at its 40GWh facility in California, and Musk expects growth in this segment to continue outpacing growth in vehicle sales. More households and businesses are opting for battery storage not only to store energy from green sources like solar, but also to increase their energy security especially in places where extreme weather is on the rise.
Image source: Tesla.
Could Tesla rejoin the $1 trillion club later this year?
Based on Tesla's $3.12 in non-GAAP (adjusted) earnings per share for 2023, and its stock price of $195.50, it trades at a price-to-earnings (P/E) ratio of 62.7. That makes Tesla stock almost 3 times more expensive than the benchmark S&P 500 index, which trades at a P/E ratio of 21.5. Automakers Ford and GM trade at P/E ratios of just just 7.1 and 4.9, respectively.
Even if investors value Tesla as a tech stock rather than an automaker -- which is reasonable considering all of its business initiatives beyond car manufacturing -- Tesla is twice as expensive as its peers in the Nasdaq-100 technology index, which trades at a P/E of 30.3.
To be clear, I'm not suggesting Tesla stock is about to halve in value yet again. I think there are enough long-term catalysts on the horizon to keep investors interested, especially if a new EV model spurs fresh demand from lower-income consumers. However, there probably won't be enough growth drivers to push Tesla stock higher this year.
Given Tesla is valued at $650 billion as of this writing, I don't think it will muster the 53% gain it needs to rejoin the $1 trillion club in 2024. The long term is a very different story, assuming the widespread release of full self-driving and sales of the Optimus robot.
