2024 has begun with an unfortunate dip in fortune for leading American car manufacturer Tesla, Inc. (TSLA), as it finds itself relegated to the 10th spot on the leaderboard of the highest-valued corporations in the S&P 500. The plummeting value of Elon Musk's TSLA shares by over a quarter this year has significantly eroded the EV company's market cap to approximately $589 billion.

The downturn was initiated by TSLA's prediction of a dramatic deceleration in deliveries for the year 2024, contrasting to last year’s 21% commendable growth rate. This foreboding outlook has unnerved investors, culminating in a steady descent in TSLA's stock value.

Adding to its woes, TSLA is compelled to recall practically all the automobiles it has sold in the U.S., owing to the inadequately sized warning lights on the dashboard. The expansive recall spans about 2.2 million vehicles, such as the Model S, Model Y, and the Cybertruck, which all share the faulty warning light issue, sold between 2012 and 2024.

TSLA owners may have to grapple with yet another setback. Amid the warning light debacle, emerging reports of steering issues might necessitate a further recall of around 334,000 TSLA vehicles.

Now, let us delve into the crux of the matter…

The National Highway Traffic Safety Administration (NHTSA) issued multiple recalls of TSLA vehicles due to an issue with brake, park, and antilock brake warning lights. The notification displays for these crucial safety features use a font size beneath the minimum requirement established by federal standards, potentially hampering readability. This could subsequently raise the threat of collisions. The recall will be executed through over-the-air (OTA) software updates, as per the information provided by NHTSA. There is also an ongoing investigation into complaints about steering failures, which may result in an additional future TSLA recall.

Last July, NHTSA started investigating several claims regarding loss of control on the 2023 Model Y and Model 3 vehicles. TSLA has reportedly commenced the software updates already, with vehicle owners slated to receive notification letters from March 30 onwards.

Drivers reported losing control over steering, often coupled with warnings of power-assisted steering being restricted or disabled. In one instance, a driver was allegedly unable to complete a turn, resulting in a collision with another car. There were also reports of TSLA cars blocking intersections or roadways, with over 50 vehicles necessitating towing.

The current predicaments are not the only instances of issues prompting TSLA recalls. In December, an over-the-call recall curbing the use of its Autopilot feature following a two-year-long NHTSA investigation into roughly 1,000 crashes reportedly occurring while the semi-automated feature was active. Concurrently, a year ago, there was a recall of 363,000 U.S. vehicles equipped with its "full self-driving" or FSD function – a decision by NHTSA ruling citing violation of traffic regulations by FSD-enabled vehicles.

Both NHTSA and the National Transportation Safety Board (NTSB) have been probing into incidents involving TSLA vehicles employing multiple driver-assist features, including crashes at the scene of other accidents involving emergency vehicles.

Meanwhile, TSLA continues to draw public and legislative attention over accusations of autopilot-contributed accidents. Furthermore, battery-related malfunctions, including fires, have been documented in TSLA vehicles. Despite the consensus on the safety of EV batteries, these events have reinforced scrutiny of EV safety norms and the possible risks intrinsic to their power storage systems.

The recent recall did not necessitate personal visits to the service center by owners of TSLA vehicles. A remote resolution was provided by the automaker, effectively negating substantial costs or liabilities stemming from the recall incident. As observed in TSLA's most recent earnings report, they allocated $2.33 billion in 2023 toward warranty provisions, a figure that accounted for 2.4% of their total annual revenue of $96.77 billion. In addition, TSLA's strong liquidity and profitability were underscored by its net income of $15 billion and an operating cash flow of $13.26 billion in the fiscal year 2023.

Despite these positive numbers, TSLA's reputation could take a hit due to a successive wave of safety concerns.

The company's future success hinges on its capacity to bolster production and delivery frameworks. Past delays in product launches and production ramp-ups could pose a recurring issue. Instances of unexpected supplier-related issues affecting the initial ramp of the first Model X and challenges in ramping full automation for specific initial Model 3 manufacturing processes are indicative of such potential difficulties.

Moreover, as TSLA aims to broaden its vehicle offerings and extend its global footprint, assurances cannot be given regarding its ability to successfully and promptly introduce and scale new and unique manufacturing methods or design elements related to new products.

In addition to the recalls, in less than two months, the EV giant temporarily suspended production at its Giga Berlin plant in Germany and recently faced significant legal repercussions. Its stocks dwindled after Germany’s SAP canceled EV procurement plans from TSLA due to delays in delivery schedules and unpredictable price variations.

TSLA’s significant price reductions on models across the U.S., China, and other regions could catalyze sales but may concurrently exert negative pressure on the company's gross margins. Increased costs of raw materials and obstacles in logistics are anticipated to produce a detrimental effect on overall performance results.

On top of these factors, financial analysts have lowered their estimates for the current year based on diminished delivery projections. Financial firm Piper Sandler shared its less-than-promising forecast for the auto manufacturer, predicting the delivery of around 1.93 million vehicles this year. This prediction corresponds to a growth rate of approximately 7%, significantly less than CEO Elon Musk's ambitious plan of achieving a 50% annual growth target he set three years ago.

For the fiscal first quarter ending March 2024, analysts expect TSLA’s revenue to increase 9.3% year-over-year to $25.49 billion, while its EPS is expected to decline 20.4% year-over-year to $0.68.

TSLA’s stock is trading below its 50-, 100-, and 200-day moving averages of $228.55, $233.28, and $232.20, respectively, indicating a downtrend.

However, Wall Street analysts expect the stock to reach $218.57 in the next 12 months, indicating a potential upside of 18.1%. The price target ranges from a low of $23.53 to a high of $345.

Bottom Line

TSLA remains a pioneering force in technological innovation, consistently spearheading the development of groundbreaking ideas and products. However, this appears to be outside the realm of safety, considering the recent recalls. As technology advances, it becomes imperative for TSLA to address safety concerns and establish transparent guidelines regarding product liability to preserve public trust and uphold stringent safety standards.

Automobile manufacturers traditionally have strategies in place to deal with warranty and recall situations, often setting aside funds reserved for such eventualities. Although a recall can potentially affect fiscal performance, it is generally unusual for one to significantly hamper quarterly earnings.

For investors, hardware recalls that necessitate physical dealership visits are usually more costly than software recalls. Given that TSLA's current major recall will be remedied through OTA software updates, its direct financial implications on the company are predicted to be minimal.

However, investors must remain vigilant for potential indirect ramifications. The recalls could detract from TSLA's credible defense in numerous prominent lawsuits relating to autopilot-linked crashes. Until now, TSLA has triumphed in these cases by underlining the necessity of active driver engagement and supervision, as stipulated in the owner's manual and online resources.

Notably, there is significant potential for the company to boost its profit margins through full self-driving subscriptions. Also, amid the expanding energy storage realm, TSLA is primed to become the leading supercharger network provider for EVs across America.

With a $3.6 billion investment dedicated to expanding the Reno, Nevada Gigafactory, TSLA is on course for mass-producing the Semi and the batteries it requires, plus the $2.4 million Megapacks. This initiative is anticipated to spur considerable sales growth due to TSLA's Lathrop, CA plant.

In mid-2025, TSLA plans to commence production of the $25,000 Redwood model – a potential game-changer in EVs. This development comes alongside the revamped Model 3 Highland and the Model Y, already the world's top-selling vehicle. These revamped models could likely boost sales performance.

TSLA's relentless focus on efficient cost reduction is expected to amplify the competition's challenges further. Established automakers looking to pivot toward EVs have been consistently losing money, leading them to postpone their plans. This could predictably prove advantageous to TSLA in the long run. Coupled with EV startups struggling to sell their limited inventory, they have been compelled to lay off newly recruited and trained employees — developments that may hinder their chances of business sustainability.

However, investors should note that TSLA faces financial headwinds amid the high-interest rate environment, which exacerbates financing costs and decreases discretionary consumer buying patterns. TSLA’s aggressive pricing strategies enacted in response to diminished demand and fierce competition have not achieved the desired impact.

Worrisome, too, is TSLA's non-GAAP forward P/E multiple of 56.57, which exceeds the industry average of 15.82. Should TSLA's market cap decrease to meet this industry average, it might significantly undermine shareholder confidence.

Investment consideration should further factor in ongoing uncertainty linked to analysts' skeptical views on the company's prospects. This skepticism represents a potential risk for current or prospective investors considering TSLA stock.

Hence, investors should consider the overall scenario and proceed with caution before investing in the stock.