With shares already down over 20% year to date, Tesla (TSLA -1.80%) has been off to a rocky start in the new year. Its challenges came to a head after the company reported fourth-quarter earnings, and CEO Elon Musk announced vehicle volume growth will be notably lower in 2024 -- continuing the worrying trend that plagued the company in 2023.
Unfortunately for investors, Tesla's problems run quite deep and will need a long time to solve. Let's explore some of the reasons why investors should be increasingly cautious with the stock.
Are electric vehicles still a growth industry?
Around the world, governments have been pushing the transition to electric vehicles (EV). The EU wants to phase out all emissions-producing cars by 2035, while China wants EVs to represent 40% of new car sales by 2030. But while automakers have raced to satisfy government objectives, perhaps too little attention has been given to what consumers actually want, leading to EV supply outstripping demand as margins deteriorate due to excess competition.
For Tesla, the problem has become apparent. For most of its history, the company could sell its cars practically as fast as it could produce them, taking advantage of unmet demand in the market. But increasing government promotion of the industry may have introduced too many new rivals, eroding the foundation of Tesla's growth story.
Because of its economies of scale and innovative manufacturing techniques, Tesla can still keep its often deeply unprofitable American rivals at bay. But Chinese automaker BYD will be much harder to fight because of its high levels of vertical integration (it makes its own batteries and even owns lithium mines). In Tesla's fourth-quarter earnings call, Musk made the stunning claim that Chinese EV firms will "demolish" rivals without trade barriers. This remark suggests Tesla's leadership no longer believes it can compete "fair and square" in a free market.
Artificial intelligence might not save the day
With Tesla's EV leadership no longer so obvious, investors are increasingly turning to its artificial intelligence (AI) efforts to power the next leg of growth. The company is working on a supercomputer called Dojo designed to handle data generated by its full self-driving program and to help with other initiatives like robotics and computer vision, which could allow machines to perform tasks that previously required humans.
Image source: Getty Images.
According to Morgan Stanley analyst Adam Jonas, these investments could eventually add $500 billion to Tesla's market cap by unlocking new revenue streams like software and technology licensing. But it's hard to remain optimistic about Tesla's AI potential when management seems less than convinced.
In the fourth-quarter earnings call, Musk threw cold water on the AI thesis by calling Dojo a "long shot," implying a potentially high payoff but a low probability of success. While Musk believes the opportunity could eventually be worth hundreds of billions if successful, he makes it sound more like a gamble than an imminent growth driver for Tesla.
Tesla's valuation is too high
In light of this significant uncertainty, Tesla stock's pricey valuation has once again become difficult to ignore. With a forward price-to-earnings (P/E) multiple of 56, shares trade at a significant premium to the S&P 500 average of 22. And this is a lot to pay for a company with slowing automotive growth and an uncertain path forward in AI.
To be clear, Tesla is still a fantastic business with a long track record of overcoming its challenges, but a good company isn't always a good investment. Tesla is adapting to a rapidly changing EV market, and investors can already see the toll that's taking on its growth and profitability. Though it may be tempting to buy the dip, you may want to wait for a few more quarters of data before considering a position in the stock.
