This electric automaker faces one of its toughest challenges yet. But there might be light at the end of the tunnel.
Tesla (TSLA -4.24%) reported earnings after the market closed on July 23, and the results were illuminating. The company’s automotive business appears to be stagnating while margins continue to contract. Let’s dig deeper into Tesla’s challenges and discuss whether or not its CEO, Elon Musk, can pull off another incredible turnaround.
The trend is no longer Tesla’s friend
Electric vehicles (EVs) are no longer the hot and exciting opportunity they once were. U.S. sales growth has slowed to 2.6% year over year in the first quarter of 2024 (268,909 vehicles) down from a 46.4% growth rate in the prior year period. And competition is increasing as more automakers invest in the technology.
On a global scale, the biggest challenge might come from low-cost Chinese rivals like BYD, which overtook Tesla as the world’s largest EV maker in January. The Shenzhen-based company boasts in-house battery production, which allows it to offer rock-bottom prices. BYD’s cheapest car, the Seagull, starts at around $12,000, compared to Tesla’s Model 3, which retails at a relatively pricy $32,000 in China.
The good news is that BYD’s Seagull is not approved for the U.S., which would add to its production cost. And in May, the U.S. slapped a 100% tariff rate on Chinese EVs, which could help protect Tesla in this crucial market. That said, products like the Seagull could have a devastating effect on Telsa’s international growth and margins — particularly in China, the world’s largest EV opportunity.
Tesla’s valuation no longer makes sense
Despite the challenges to its EV business, Tesla still trades for a valuation more than 90 times forward earnings. This is stunningly high for a company that saw second-quarter revenue grow by just 2% year over year to $25.5 billion, while operating income collapsed 33% to $1.61 billion.
For context, the S&P 500 has an average forward estimate of just 23, and traditional carmakers like General Motors and Ford trade for forward price-to-earnings (P/E) multiples of 4 and 6, respectively. Investors who buy Tesla at current prices seem to believe it has a secret advantage that can separate it from what is traditionally a low-margin, low-growth industry.
Elon Musk can change the narrative
Love him or hate him, Elon Musk is arguably a one-in-a-million CEO. While he has had his fair share of failures, he has also consistently built cutting-edge businesses ranging from space exploration to brain surgery (SpaceX and Neuralink). His bold and unorthodox management style has helped his companies pioneer new operational strategies that were often imitated by the competition later.
Image source: Getty Images.
Under Musk’s leadership, Tesla pioneered new manufacturing strategies like Gigacasting (making car components from large molds), which is now on its way to becoming the industry norm for EV manufacturing.
Investors who buy Tesla stock now are betting on Musk’s ability to, once again, unlock value by pivoting to opportunities like artificial intelligence, self-driving cars, and robotics. The company expects to reveal its autonomous robotaxi in October (pushed back from August). Musk claims the company will begin sales of its Optimus humanoid robots in 2026.
These planned products could help Tesla transform from just another automaker into a diversified tech conglomerate. Investors must ask themselves if the potential rewards outweigh the near-term risks.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, BYD Company, Meta Platforms, and Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.