Tesla appears to be facing several challenges recently. First, it has been dethroned as the world’s best-selling EV brand by BYD. Second, the car rental company Hertz announced plans to sell 20,000 Teslas due to high repair costs. Third, Tesla is halting production at its Berlin factory because of disruptions in shipping activities in the Red Sea, leading to a shortage of parts. Fourth, Elon Musk has stirred controversy among shareholders by stating his desire for 25% voting rights as a condition for incorporating AI developments within Tesla.
The release of yesterday’s results added to the disappointment. Tesla’s 4Q23 revenue increased by only 3% from the previous year, while the operating margin continued to compress, falling from 16% in 4Q2022 to 8.2% in 4Q2023. The situation appears even grimmer in the automotive segment alone, where revenue growth was a mere 1%. These results completely missed analysts’ estimates.
Although vehicle deliveries increased, the average selling price declined due to Tesla’s price cuts to remain competitive. This reduction affected both revenue and profit margins. Additionally, expenses rose, driven by heightened spending on AI development and increased costs associated with Cybertruck production.
The 2024 outlook appears even bleaker, as highlighted in Tesla’s presentation, which stated:
“Our company is currently between two major growth waves: the first one began with the global expansion of the Model 3/Y platform and the next one we believe will be initiated by the global expansion of the next-generation vehicle platform. In 2024, our vehicle volume growth rate may be notably lower than the growth rate achieved in 2023, as our teams work on the launch of the next-generation vehicle at Gigafactory Texas.”
What this signifies is that Tesla is overhauling its entire production line and introducing an entirely new model. This development has been anticipated for a long time, and consumers have eagerly awaited it. However, production is not expected to commence until the second half of 2025.
This move aligns with Tesla’s core strategy of reimagining the most efficient methods of car manufacturing. By keeping costs low, Tesla aims to reduce prices, thereby fulfilling its goal of making EVs affordable for the mass market. This explains Tesla’s insistence on controlling every aspect of manufacturing, enabling effective cost management. Competitors who cannot match these production costs will likely struggle to compete with Tesla’s price points.
Tesla has fully capitalized on the potential of its first-generation EVs and is now moving into a new phase. The upcoming model, speculated to be a compact SUV priced at $25,000, marks a substantial shift from the existing Tesla Model 3 and Y, which are priced upwards of $40,000. What’s even more remarkable is that this new EV is expected to be priced lower than popular internal combustion engine models like the Toyota RAV4 and Honda CR-V.
I believe this is the right move. Continuously cutting prices without reducing production costs is not a sustainable strategy, as evidenced by the impact on Tesla’s financials. By adopting a new, lower-cost production process, Tesla is taking a more permanent approach. This could enable deeper price cuts, potentially making other EV manufacturers uncompetitive.
Tesla’s share price declined by 6% during after-hours trading.
Among the ‘Magnificent 7’ group of stocks, Tesla has been the worst performer, with a 16.4% decline as of January 24, 2024. In contrast, every other stock in this group has posted gains, with Nvidia showing the largest increase at 23.9%.
I don’t anticipate strong results from Tesla in the upcoming quarters during this transition phase. Nevertheless, I am optimistic about Tesla’s new generation platform and its exceptional ability to execute plans. Therefore, should the share price decline further due to pessimism, it could present a favorable buying opportunity.
