Why Some Investors May Be Disappointed in Tesla’s Deliveries

Why Some Investors May Be Disappointed in Tesla’s Deliveries

  • A premium valuation means the bar for Tesla is high.
  • Deliveries may be a disappointment in light of Elon Musk’s bullish comments on demand earlier this year.
  • Despite the growth stock’s pullback following the delivery announcement, Tesla may still pull off impressive growth in 2023.

Deliveries soared 36% year over year yet the stock is falling. Why?

Electric-car maker Tesla (TSLA -0.24%) announced some impressive vehicle delivery numbers over the weekend. Deliveries soared 36% year over year. Not only is this impressive in its own right, considering the uncertain and challenging operating environment, but it notably marks an acceleration in the company’s previous quarterly growth rate. Deliveries grew 31% year over year in the fourth quarter of 2022.

So why did Tesla’s stock price fall sharply on Monday, the first trading day after the deliveries were released? The pullback likely boils down to two things: high expectations and underwhelming growth in the context of Tesla’s recent aggressive price cuts.

Deliveries may not have lived up to Musk’s recent comments

Tesla said on Sunday that it delivered a total of about 423,000 vehicles. While this is up significantly from the approximately 320,000 vehicles delivered in the year-ago period, it may be an underwhelming figure in the context of Tesla’s recent price cuts. Earlier this year, prices for some models were reduced as much as 20%.

While these price cuts initially spooked investors and caused the growth stock to sell off, Tesla CEO Elon Musk calmed investors during a quarterly earnings call in January, noting that “Thus far in January, we’ve seen the strongest orders year-to-date than ever in our history.” He even said the current rate at which Tesla was receiving orders was “almost twice the rate of production.” Of course, these order rates followed Tesla’s price cuts, so there was the looming question: how much of this demand would dwindle after price cuts faded into the rearview mirror?

All of this to say, investors may have been hoping for more than a 4% sequential increase in quarterly deliveries, considering Musk’s comments in January.

A high valuation has consequences

Another factor likely weighing on the stock is its valuation. With a market capitalization of over $600 billion, investors have priced in rapid growth from the automaker for years to come. Any time risks increase to Wall Street’s expectations for Tesla’s rapid growth trajectory, the growth stock can take a hit. After all, with a price-to-earnings ratio of more than 51, strong growth over the next decade will be required for the company to live up to the valuation investors have assigned the stock.

Driving home why investors may have particularly high expectations for the stock right now, Tesla stock has had an incredible run this year. Year to date, shares are up more than 57%. With such specular gains in 2023, investors are likely holding the company to a high standard.

All of this said, there’s still a lot of reason to expect exceptional growth from Tesla for the full year. First of all, it’s not like 36% year-over-year growth in Q1 isn’t bad — even in light of Tesla’s premium valuation. So the company is, at the very least, off to a respectable start to the year. Second, Tesla is still ramping up production at two new factories, both of which currently have tooling installed for a production capacity of up to 250,000 units each (though it will take some time for production at these factories to ramp up to these levels). As production capacity improves at these factories, Tesla may pull more demand levers to drive further sales, whether it’s through referral programs, more price cuts, or some other method.

Investors will certainly be watching the company closely this year. Tesla generally aims to grow vehicle production and deliveries at a compound average rate of approximately 50% annually. But it often warns investors that the trajectory could be volatile, with growth coming in below this figure in some years and above it in others.

Will deliveries be strong enough in 2023 for investors to keep betting Tesla can sustain such a robust level of growth over the next few years?

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