January was a great month for most stocks, but not so much for Tesla (TSLA +2.71%). The leading electric vehicle (EV) manufacturer's stock fell by 24.6% in January and continues to fall in February, according to data from S&P Global Market Intelligence. Shares are currently off 55.5% from all-time highs set in 2021.
Here's why investors are souring on Tesla's prospects in 2024.
Contracting margins, low growth warning
In its Q4 earnings, Tesla reported another quarter of unit volume growth, with total car deliveries to customers up 20% year over year compared to 2022. However, due to its aggressive price cuts to prop up demand, Tesla's revenue only grew 3% year over year in Q4 2023. But honestly, that's one of the best numbers from the report.
Gross profit fell 23% in Q4 due to lower selling prices that Tesla had to implement in order to get inventory out the door, while operating income declined a staggering 47% year over year. Investors are likely worried about these contracting profit margins and what it means to Tesla's earnings power over the next few years.
Despite these low selling prices, CEO Elon Musk guided for lower unit volume growth in 2024. Slowing growth and lower prices is a tough pill for most investors to swallow, and indicates the Tesla brand is not resonating with consumers as it once did. Either that or the EV market is much smaller than investors expected a few years back.
NASDAQ: TSLA
Key Data Points
The stock is still pricey
Even though Tesla stock has fallen 55% from highs and a staggering 25% in one month, shares still look expensive. Its trailing price-to-earnings ratio (P/E) is 41.1, which is much higher than the S&P 500 average of 27. Tesla's operating earnings have gone in the wrong direction for multiple quarters and now sit at $8.9 billion over the last 12 months.
With average selling prices falling and growth expected to be meager in 2024, Tesla will likely see earnings decline once again in 2024. That would make its forward P/E a lot higher than 41.1, which is already above the market average. A high earnings multiple and falling earnings is a recipe for poor stock returns.
There is a lot of hype around Tesla stock and its eccentric CEO Elon Musk. Many investors claim to buy the stock because of the clean energy revolution, robotics, or even artificial intelligence (AI) breakthroughs. But at the end of the day, a stock will move up or down based on its earnings power. Tesla's earnings power is moving in the wrong direction.
