Tesla (NASDAQ: TSLA) stock price has been one of the most rewarding in Wall Street. It has jumped by more than 19,000% since going public in 2010. Along the way, it has created several billionaires and many millionaires. Today, the company has a market cap of over $667 billion, making it more valuable than the next 7 automakers combined.
It has been an extremely risky thing to short Tesla in the past decade. Over the years, most short-sellers like Jim Chanos have lost a fortune as the company has broken records. At its peak, it was valued at over $1 trillion. Still, I believe that Tesla faces numerous headwinds in the future.
No longer a growth story
The main reason why the Tesla stock price surged is that it had a first-mover advantage in the electric vehicle industry. As a result, it had a pole position in the software and hardware side. Today, the company has the biggest charging network in the US.
This advantage saw it boost its production and profits. Tesla sold 75k vehicles in 2016 and 1.3 million in 2022. While this is a remarkable growth, there are signs that the company’s growth is now slowing. It expects to produce and sell 1.8 million vehicles this year.
All this means that the company’s growth is fading as competition in the EV industry rises. In China, Byd is firing on all cylinders. Similarly, other companies like Xpeng, Li Auto, and Nio are selling thousands of vehicles every month.
The same is true in other countries like in the United States and in Europe. While Tesla has the lion’s share in the industry, its role is shrinking as competition rises. Some of the top competitors are companies like Hyundai, Toyota, Rivian, and GM.
Tesla margins are slipping
As a result, Tesla has been forced to slash prices in a bid to boost its market share. As a result, this has compromised its margins. Ideally, you’d expect a company that is growing fast to have higher margins. In Tesla’s case, gross margin jumped to 27.1% in 2022 and reached 21.50% in the most recent quarter.
Tesla’s business will continue doing well in the next few years because of the quality of its products. However, it lacks key catalysts that will supercharge this growth. A pickup truck would be a good option, especially in the United States.
The challenge is that it seems like the Cybertruck is having huge production challenges. It is also unclear whether the truck will be as successful as Ford F150, Silverado, and Toyota Tundra. In a statement, Elon Musk said:
“So, I just want to temper expectations for Cybertruck. It’s a great product, but financially it will take, I don’t know, a year to 18 months before it is a significant positive cash flow contributor. I wish there was some way for that to be different, but that’s my best guess.”
I see no major catalyst that will supercharge Tesla’s performance in the near term. A likely catalyst would be lower interest rates, which will make its vehicles more affordable. However, the Fed has maintained that rates will remain at an elevated level for a long time.
The government is also struggling to sell long-term bonds unless it agrees to pay higher interest rates.
Tesla valuation challengesWatch here: https://www.youtube.com/embed/kqGeYt1_RBU?feature=oembed
Therefore, it is relatively difficult to validate the company’s valuation metrics. The company has a forward PE multiple of 69.64, which is much higher than the sector median of 14.17. Its forward EV to sales stands at 7.08, also higher than the industry average of 1.15.
Tesla deserves a premium valuation compared to companies like Toyota, General Motors, and Honda. The same is true for companies like Visa and Mastercard.
However, for this valuation gap to continue, we need to see strong revenue and profitability growth, which is clearly deteriorating. Tesla’s revenue grew by 28% in the last quarter, lower than the 5-year average of 47%. Its forward EBITDA growth stands at 21%, which is also lower than its historical average of 64%.
The other challenge for Tesla stock price is that it is slowly invalidating the invalidated head and shoulders pattern. It has now dropped below the right shoulder at $210. This means that it could continue falling sharply in the coming weeks if the invalidation holds.
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