Ouch. Shares of electric-car maker Tesla (TSLA 15.31%) were slammed earlier this week, falling nearly 5% on Tuesday. Wall Street sold off shares after the company reported worse-than-expected first-quarter deliveries.
With the stock down more than 30% this year and over 20% over the last three years, it's been a rough run for Tesla shareholders. After the company dramatically underperformed the S&P 500's gain of more than 29% over the last three years, is it time to get greedy when others are fearful and buy the dip in Tesla stock? Or is its poor performance a sign of underlying problems worth staying away from?
Tesla's disappointing first-quarter deliveries
In Tesla's fourth-quarter update in late January, management said it expected its vehicle volume growth in 2024 to be "notably lower" than it was in 2023. This forecast, as conservative as it sounded at the time, has unfortunately proven to be overly optimistic so far. Tesla's first-quarter vehicle production and delivery volumes didn't even grow. Indeed, they both fell sequentially and year over year.
Tesla produced 433,371 fully electric vehicles during Q1, down from about 495,000 in the fourth quarter of 2023 and 441,000 in the first quarter of last year. First-quarter 2024 deliveries of 386,810 were down from approximately 485,000 and 423,000, respectively, in the fourth and first quarters of 2023.
Management provided some explanation for the disappointing quarter in its production and deliveries press release: "Decline in volumes was partially due to the early phase of the production ramp of the updated Model 3 at our Fremont factory and factory shutdowns resulting from shipping diversions caused by the Red Sea conflict and an arson attack at Gigafactory Berlin."
We can also presume that higher interest rates and an overall difficult macroeconomic environment for new-car sales were likely constraining demand.
Tesla CEO Elon Musk has been candid about higher interest rates' impact on demand. Musk explained during Tesla's fourth-quarter earnings call:
It's always important to remember that [for] the vast majority of people buying a car, [it] is about the monthly payment. ... As interest rates drop and that monthly payment drops, then they're able to afford it and they buy the car. It's pretty straightforward.
Big challenges ahead
But interest rates aren't Tesla's only problem. The company is also experiencing a lull in its product cycle.
"We are between two major growth waves," said Tesla Chief Financial Officer Vaibhave Taneja in the company's fourth-quarter earnings call. The first wave, he explained, was the growth driven by the global rollout of Model 3 and Y. The next wave, Tesla management predicts, will be driven by a higher volume, lower-cost vehicle.
Unfortunately, there's not yet a definitive timeline for the launch of Tesla's planned lower-priced vehicle, which it often refers to as its "next-generation platform."
This lull in sales and uncertainty about the future creates serious challenges for Tesla since the automotive industry is both extremely capital-intensive and highly dependent on scale. Product development in the auto business is difficult, costly, and unpredictable. With sales declining, Tesla's profit margin will likely narrow, and net income and cash flow could take a big hit.
Because Tesla has a war chest of cash and a passionate and large customer base, the company will likely get through these challenges. In light of them and their accompanying uncertainty, however, the stock, which is trading at about 39 times earnings, is arguably still not trading low enough to make it a buy.
Investors interested in owning shares might want to wait for a potentially lower price to reduce some of the risk of possibly overpaying. Further, it may be worth waiting for management to demonstrate a clearer path to a timely return to rapid top-line and bottom-line growth before buying shares.
