Tesla 'is increasingly looking like a regular auto company,' says one analyst

Tesla’s price cuts this year show customers are no longer willing to pay a premium for its vehicles. That raises a key question on Wall Street: Does its lofty stock-market valuation make sense anymore?

The immediate verdict after the electric-vehicle maker reported earnings was, not so much. The shares sank 9.3% to $220.11 in New York on Thursday, wiping out more than $70 billion in value. 

Tesla’s nearly $700 billion market cap still dwarfs that of its competitors, but profitability in Elon Musk’s core car-selling business plunged to the lowest in over four years in the third quarter. That squeezed margins to near what General Motors Co. and Ford Motor Co. generate.

Pricing tension is a broader issue facing Corporate America, with companies testing consumer spending fatigue. Some companies are weathering it better than others. Netflix Inc., for example, had a surge in subscribers that enabled the streaming-service provider to raise prices for a large swath of customers. 

To justify Tesla’s stock price, investors have to believe it “can achieve very high volumes and high operating margins, akin to technology or software companies, not traditional auto companies,” said Sanford C. Bernstein analyst Toni Sacconaghi.

Tesla “is increasingly looking like a regular auto company,” he said.

Price cuts failing

Its bigger problem is the company’s price cuts aimed at boosting demand haven’t worked as planned. 

“Tesla has had to institute these price cuts only to sell fewer vehicles than analysts earlier expected,” said Ryan Brinkman, an analyst at JPMorgan Chase & Co. At this time last year, before the price cuts, Wall Street estimated about two million vehicle deliveries in 2023, he said. That’s dropped to 1.8 million.

Tesla’s “valuation looks increasingly unsustainable,” he said.

The stock is still up almost 80% year and remains one of the top gainers in the S&P 500 Index for 2023. Most of that strength came as investors bet on artificial-intelligence plays, with some saying Tesla has the potential to become a leading AI company. 

However, it may take Tesla decades to deploy its self-driving software. Moreover, becoming a dominant player in the future self-driving car industry would still require the company to maintain its current lead in the EV industry amid growing competition.

Wednesday’s results and Musk’s commentary on the company’s earnings call are raising questions around that as well, even among those who have been bullish on the stock. 

Tesla’s caution, expressed on the call, around growing too fast amid elevated interest rates is fair, said Morgan Stanley analyst Adam Jonas.

Still, he added, “how much of the caution is related to slowing demand for its already ubiquitous product lineup and increased competition?”