China’s electric vehicle (EV) stocks started the new year on the wrong foot, as heightened competition and continued price wars pressurized the profitability of automakers.
Morgan Stanley highlighted growing competition concerns in its note: “Investors remain cautious as China’s auto market has had a volatile start to the year as competition and macro uncertainties persist.”
Also, in a report on the Chinese EV industry earlier this month, Bernstein analysts said, “We expect competition within the domestic market to remain intense and put pressure on pricing and profitability.”
There are too many automakers fighting for EV market share in China. Tesla, Inc. (TSLA) has slashed the prices of its Shanghai-made vehicles by up to 6% in a strategic move to maintain its leading position in the premium segment of the world’s largest EV market.
The Texas-based company recently announced that the base version of the Model Y crossover vehicle starts at nearly $36,000, a decline from about $37,000. The base Model 3 now starts at about $34,500, down from $36,500.
Tesla has cut prices aggressively across its markets worldwide since late 2022 due to higher interest rates, a period of uneconomic certainty, shifting consumer sentiment, and intense competition.
For instance, a U.S. rear-wheel drive Model 3 began at approximately $47,000 in 2022. Its price was cut to about $44,000 in January 2023 and $40,000 following a price cut in April. After one more cut in October, the price of a new U.S. Model 3 ended 2023 at about $39,000.
The recent price cuts in China by Tesla will fuel more fears about competition and profit margins among investors.
Shares of TSLA have plunged more than 7% over the past month and nearly 19% over the past six months.
Now, let’s discuss several other factors that could impact TSLA’s performance in the upcoming months:
Quarterly Deliveries and Production Beat Estimates
Tesla delivered nearly 484,000 vehicles in the fourth quarter, surpassing analyst expectations of 483,173, as compiled by Bloomberg. The company produced 494,989 vehicles, beating the consensus estimate of 482,336. For the full year 2023, the Elon Musk-led automaker reported deliveries of 1.81 million and production of 1.85 million, representing growth of 38% and 35% year-over-year, respectively.
The company delivered 461,538 Model 3 and Model Y vehicles during the fourth quarter and reported production of 461,538 for these models. TSLA didn’t break down Model S or X production or delivery numbers, instead batched them into “Other Models.” It delivered 22,969 other models and produced 18,212 vehicles for the quarter.
In 2022, TSLA reported annual deliveries of 1.31 million and production of 1.37 million vehicles, a nearly 40% increase from 2021.
During the last earnings call held in October 2023, TSLA’s management said that the company would hit at least 1.8 million deliveries for the full year, a number they had revised down from a 2 million target earlier.
Dethroned as the EV Global King
Chinese automaker BYD Co. (BYDDY) reported that it delivered 526,409 fully electric cars during the fourth quarter, topping TSLA for the first time. China’s top-selling car brand reported EV and hybrid sales of 341,043 in December 2023, including 190,754 all-electric cars, aided by aggressive year-of-year discounting. In total, BYD sold 3.01 million vehicles in 2023.
Moreover, BYD produced more than 3 million new electric vehicles in 2023, beating TSLA’s production for a second consecutive year.
Disappointing Last Reported Financials
In the third quarter that ended September 30, 2023, TSLA posted revenue of $23.35 billion, missing analysts’ estimates of $24.14 billion. Its gross profit decreased 22.4% year-over-year to $4.18 billion. The company’s operating expenses increased 42.5% year-over-year to $2.41 billion.
Musk-led EV maker reported income from operations of $1.76 billion, down 52.2% from the prior year’s period. Its adjusted EBITDA declined 24.4% year-over-year to $3.76 billion. The automaker’s adjusted net income attributable to common stockholders decreased 36.6% from the previous year’s quarter to $2.32 billion.
Furthermore, the company reported an adjusted EPS of $0.66 for the third quarter, below the consensus estimate of $0.73. That compared to $1.05 in the same quarter of 2022.
Tesla’s net cash provided by operating activities was $3.31 billion, down 35.1% year-over-year. Its free cash flow decreased 74.3% from the year-ago value to $848 million.
Unfavorable Analyst Estimates
Analysts expect TSLA’s revenue for the fourth quarter (ended December 2023) to increase 6% year-over-year to $25.76 billion. However, the consensus EPS estimate of $0.73 for the same period reflects a 38.3% year-over-year decline. In addition, the company has missed the consensus revenue estimates in three of the trailing four quarters.
For the fiscal year 2023, the company’s EPS is expected to decrease 21.8% year-over-year to $3.18. Street expects the automaker’s EPS to decline 4.6% year-over-year to $0.81 for the first quarter ending March 2024.
Suspension of Production at German Factory
According to Reuters, Tesla plans to suspend most production at its factory outside Berlin in Grunheide, Germany, from around January 29 to February 11 due to the ongoing conflict in the Red Sea that has disrupted global trade.
“The considerably longer transportation times are creating a gap in supply chains,” Tesla told Reuters in a statement.
Analysts at Baird estimate Tesla produces between 5,000 vehicles and 7,000 vehicles per week at its Berlin factory. The shutdown of this vehicle assembly plant in Germany would result in a 10,000-14,000 hit to deliveries in the first quarter of 2024, said analysts Ben Kallo and David Sunderland in a note.
The Baird analysts added that they are “wary” of further effects on the company’s supply chain, and they are “closely monitoring” any impact on its shipping routes from China.
Tesla EVs in Regulators’ Scrutiny
Moving into 2024, Tesla faces growing pressure from regulators. The auto giant faces a new investigation from regulators in Norway and Sweden after a Reuters report alleging that the company covered up defects and charged its customers for repairs that should have been under warranty.
In a statement to Reuters, Sweden’s Transport Agency confirmed “that investigative work is also underway with us” shortly after Norway’s traffic safety regulator launched its probe into reports of repeated suspension failures affecting Tesla models.
Norwegian Public Roads Administration (NPRA) senior engineer Tor-Ove Satren stated that the agency began questioning Tesla in September 2022 and asked the auto company to assess consumer complaints about lower rear control arms breaking on its Model S and X vehicles.
Satren added the agency could recommend that Tesla recall all model years of the S and X vehicles to replace rear lower control arms if it determines they pose a “serious risk.”
Concerns Surrounding Tesla’s Cybertruck
Experts raised safety concerns regarding the angular design of Tesla’s Cybertruck as the electric pickup truck’s stiff stainless-steel exoskeleton could hurt pedestrians and cyclists, damaging other vehicles on roads.
“The big problem there is if they really make the skin of the vehicle very stiff by using thick stainless steel, then when people hit their heads on it, it’s going to cause more damage to them,” said Adrian Lund, the former president of the Insurance Institute for Highway Safety (IIHS), whose vehicle crash tests are an industry standard.
Elon Musk earlier mentioned in Tesla’s third-quarter earnings call that the company was facing several challenges in scaling its production. He also cautioned that Cybertruck won’t deliver considerable positive cashflow for 12 to 18 months after production starts.
Musk said, “It is going to require immense work to reach volume production and be cashflow positive at a price that people can afford” with the Cybertruck. He added, “I just want to temper expectations for Cybertruck. It’s a great product, but financially, it will take a year to 18 months before it is a significant positive cash flow contributor.”
Elevated Valuation
In terms of forward non-GAAP P/E, TSLA is currently trading at 68.73x, 345.6% higher than the industry average of 15.42x. Likewise, the stock’s trailing-12-month EV/Sales and EV/EBITDA of 6.94x and 41x are significantly higher than the industry averages of 1.23x and 9.88x, respectively.
Additionally, the stock’s forward Price/Sales of 7.12x is 695.1% higher than the industry average of 0.89x. Its forward Price/Cash Flow multiple of 54.58 compares to the industry average of 9.88.
Decelerating Profitability
TSLA’s trailing-12-month EBITDA margin and net income margin of 15.80% and 11.21% are higher than the respective industry averages of 10.96% and 4.56%. However, the stock’s trailing-12-month gross profit margin of 19.81% is 44% lower than the 35.38% industry average.
Also, the stock’s trailing-12-month levered FCF margin of 1.68% is 68.9% lower than the industry average of 5.40%.
Bottom Line
TSLA has repeatedly cut prices in China and other global markets since late 2022, leading other automakers to respond and squeezing profit margins industry-wide. Several price cuts were made due to weakened demand amid higher interest rates and a period of economic uncertainty coupled with intense competition in the EV industry.
Following the decline of news that the company could suspend production at its Giga Berlin factory due to Red Sea-related supply disruptions, Tesla’s stock plunged further after the automaker announced new price cuts in China. These price cuts come as competition continues to get intense on the Chinese mainland.
Moreover, BYD has gone more upmarket, pushing into segments where TSLA operated and found success.
The automaker’s third-quarter revenue and earnings missed analysts’ estimates. Further, Wall Street appears bearish about TSLA’s outlook as the company grapples with several challenges, including supply disruptions, growing regulatory concerns, sliding margins due to price cuts, intense competition, and weakened consumer demand amid a high-interest rate environment.
In mainland China, passenger EV sales growth plunged to 28% in the third quarter of 2023 compared to 108% in the same period a year ago, as per China Association of Automobile Manufacturers data quoted by Fitch Ratings.
According to Fitch Ratings, the growth slowdown will get worse this year. “We expect China’s domestic passenger car demand to increase modestly in 2024 to nearly 22 million units amid economic uncertainty,” said Fitch Ratings.
Considering these factors, TSLA shares are best avoided now.
