Is TSLA’s 28% Drop Just the Beginning?

Is TSLA’s 28% Drop Just the Beginning?

Tesla Inc CEO Elon Musk

Market-related forces are just one reason to avoid Tesla right now

  • Early investors have reaped incredible returns from holding Tesla stock long-term, but questions are mounting.
  • The company’s performance in recent years has been lackluster compared to its megacap peers.
  • Investors are now questioning the company’s growth outlook, with delivery and inventory concerns building.

Tesla is a company that’s seen incredible growth since its IPO and is a stock many investors still stand behind. That makes sense, given the degree to which TSLA stock has outpaced the Nasdaq and most indexes over the long-term.

However, at its current valuation, investors are starting to question the company’s fundamentals and its growth profile moving forward. The rise of other options-friendly stocks in the market — namely, Nvidia — have provided investors with another megacap stock to trade like a penny stock.

Elon Musk hasn’t done himself many favors in catering to his much more left-leaning early adopter base.

Halfway into 2024, TSLA stock has already seen a 28% decline. Despite this fact, the company’s stock price still hovers around $184 per share. Personally, I think TSLA stock is significantly overvalued at this level. Here’s why.

Overvaluation Is Becoming a Concern

I’m not the only one becoming concerned about Tesla’s current valuation. Many investors are starting to question the company’s growth path moving forward, with so much of the company’s current stock price tied to future earnings which remain uncertain.

During April 23’s earnings call, Musk discussed some of Tesla’s plans, including its “affordable” EV rollout, robotaxis, and increased deliveries in the coming quarters.

After the earnings report and conference call, Musk received a partial approval of its Full Self-Driving launch in China. Despite Musk’s optimism for Tesla, Wall Street doesn’t seem too impressed because of its disappointing numbers.

As of June 17, earnings per share estimates have declined down to $2.41. The market continues to change their estimates for TSLA for 2024 and 2025. Currently, analysts have an average forecast of $3.29, which was a drastic decline from 2023’s $5.27.

Moreover, this company’s valuation also contradicts other large-cap automakers, who sport much more attractive forward price-earnings ratios.

While Tesla is trying to rebrand itself as an AI company, it’s becoming increasingly clear to more investors this is a car company first. On this basis, it’s hard to understand why such a premium multiple exists.

Fundamentals Appear to Be Deteriorating

Although the company’s technological achievements have been impressive, investors may still want to take caution with Tesla. Macroeconomic challenges and high interest rates continue to persist. These factors will continue to hamper the stock, alongside its peers in the EV and general automotive sectors.

Amid concerns of lower demand and price pressures, Tesla has streamlined its workforce to about 121,000 globally. These job cuts included temporary staff, marking a reduction of over 14% this year. That’s not bullish for those assigning some sort of growth premium to this stock.

The count is based on Tesla’s email distribution list as of June 17, not payroll data. CEO Elon Musk announced plans to reintroduce stock options for exceptional performance after pausing such awards earlier, as reported earlier by Reuters.

Investors’ high valuation reflects optimistic expectations: envisioning Tesla under Elon Musk as a global robotaxi fleet, energy giant, or AI leader. However, paying a steep premium for such uncertain prospects may not be prudent.

TSLA Stock Remains a No-Brainer Sell

Barclays are among the analysts taking a cautious approach to Tesla ahead of Q2 2024 results, maintaining an “Equal-Weight” rating with a $180 per share target. Analysts expected Tesla would deliver about 415,000 vehicles, an increase from Q1’s 386,810 but below the consensus of 444,000 units.

Analysts continue to warn that another miss in Q2 could worsen Tesla’s financial outlook, potentially leading to lower margins and further negative earnings per share revisions for 2024 and 2025. I agree and think TSLA stock is one to avoid in this current environment.

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