Tesla among top 10 losers. Next what?

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Tesla is the 7th worst performer YTD in the Nasdaq-100. It is the 11th worst performer in the S&P 500. The stock stands 28% lower.

Still, after reaching its lowest level on 22/April, the stock has rallied a remarkable 30%. On 24/April, the stock rallied 12% after the positive earnings call. On 29/April, the stock jumped another 15% after the announcement of the Baidu (9888) partnership.



Yet in the longer term, outlook remains cloudy as margin compression owing to fierce competition from Chinese EV makers and the wider EV industry slowdown.


MUSK'S CHINA VISIT LEADS TO BAIDU DEAL

Last Sunday, Elon Musk flew to China on a surprise visit. The last minute visit led to speculation over a push to launch full self driving (FSD) in China.

Persons close to the matter stated that Musk was expected to discuss the rollout of FSD software and permission to transfer data overseas, as reported in Reuters.

One of the key hold-ups for the rollout of FSD in China has been access to map data. Musk’s recent trip seems to have addressed that as Tesla announced a partnership with Baidu for map data access. While, Musk has long claimed that Teslas will be able to run FSD without map data, this will allow them to roll-out the offering much sooner and boost the slowing revenue in one of their leading markets in China.

FSD has been a recent revenue driver for Tesla. In 2024, Siena Capital analysts estimated that Tesla recognized almost USD 700 million in revenue, which represents 4.3% of their automotive revenue after stripping regulatory credits.


BYD PARTNERSHIP

Another strategic partnership that has helped boost investor sentiment at Tesla has been the strategic partnership with BYD (1211).

While both companies are major competitors, BYD recently overtook Tesla as the largest EV manufacturer in terms of overall vehicle sales (including hybrids). However, the fierce competition has also taken a toll on both companies as it has led to price cuts to win over more customers.

That’s why a technology-sharing partnership between the two companies is positive. While, they continue to compete, the partnership – specifically related to the use of BYD’s LFP battery technology in certain low-cost Tesla models – remains a positive for Tesla as it allows them to diversify their battery supply chain, reduce production costs, and enhance range for their lower-cost models.


LOW-COST MODELS COMING SOONER THAN EXPECTED

A recent hurdle for Tesla has been delay behind the upcoming low-cost Model 2 vehicle which plays a pivotal role in Tesla’s growth strategy. According to a Reuters report, Tesla had opted to cancel or indefinitely postpone plans for the upcoming Model 2. Instead, it would focus its attention on Robo-Taxis. The low-cost car represented the next phase of Musk’s long-term master plan to produce affordable electric vehicles through manufacturing process improvements.

Fears were that fierce competition in the low-cost category by Chinese manufacturers would make Tesla’s efforts unfeasible.

Yet, Elon Musk disputed the Reuters report and at the Q1 earnings investor call, it was verified. The Model 2 strategy is still on track. In fact, it may come sooner than expected at the end of 2024. Musk stated that Tesla was accelerating the launch of more affordable models that will be available to produce on its existing manufacturing lines.

Tesla aims to fully utilize its current production capacity towards these efforts and grow manufacturing 50% over 2023 before they start investing in new manufacturing lines.

Additionally, the robo-taxi push is also underway. Elon Musk stated that Tesla will launch its long-awaited robo-taxi product as soon as 8/August/2024. The autonomous driving robo-taxis will earn revenue for their owners. Moreover, owners will be able to add their Tesla's to the robo-taxi shared fleet with just one click on the Tesla app.


BEARISH CLOUDS PERSIST

Despite these recent developments, the outlook for Tesla remains undeniably cloudy. At its Q1 earnings, Tesla reported dismal results. But it’s not just Tesla which is struggling, it’s the wider EV industry.


EARNINGS SUMMARY

Tesla's Q1 2024 earnings report released on 23/April revealed a challenging quarter marked by margin compression and a slowdown in electric vehicle (EV) sales, influenced by strategic price cuts and broader economic factors.



Financially, Tesla reported a reduction in its automotive gross margin to 17.4%, down from previous quarter, reflecting the impact of significant price reductions across its model lineup intended to stimulate demand amid a softening global market.

These price adjustments, while successful in driving a short-term uptick in sales volumes, did not fully counterbalance the revenue per unit loss, leading to an overall revenue of $21.3 billion and earnings per share (EPS) of $0.45, both figures below analyst expectations. Quarterly revenue and deliveries were the lowest since 2022.



One of the bright spots has been Tesla’s efforts to control costs. Not only did the company recently announce layoffs. It also stated that it would slow the growth of its Supercharger network to bring costs under control.



Moreover, investors were not as concerned about the concerning financials following the investor call where Musk re-affirmed Tesla’s long-term strategy while maintaining that Tesla would remain lean by producing the new lineup on existing manufacturing lines, assuaging fears of spiraling costs.

Critical to note that it is not just Tesla which struggled in Q1. BYD also reported that its profits fell 47% YoY. Vehicle sales also slowed QoQ. It is the wider industry that is experiencing a slowdown.



Unfortunately for Tesla, margin compression is more concerning for it compared to its Chinese competitors. Particularly as Chinese manufacturers are able to keep costs lower with help from government subsidies. Not only does the Chinese government offer direct subsidies to manufacturers, it also offers subsidies for EV buyers in China which has led to a boom in EV sales, which has benefited Chinese EV manufacturers.



Economic slowdown from high interest rates and a domestic slowdown in China may keep EV sales subdued for some time. In which case, Tesla would be forced to continue with its price cuts which would continue to pressure margins.


TESLA'S FINANCES STRAINED UNTIL AFFORDABLE MODEL LAUNCH

With recent positive news, Tesla stock has recovered sharply. Yet, it remains one of the worst performing stocks in the S&P 500 YTD.

Bearish clouds persist for Tesla as margin compression continues due to competitive price cuts by Tesla. Amid an industry-wide sales slowdown, Tesla may be forced to continue with its strategy to offer price discounts on its cars, keeping its margins pressured. Moreover, Tesla continues to face pressure from low-cost Chinese EVs until it can launch its own low cost models.

While, Tesla’s new models are expected sooner than expected, they are still several quarters away. In the meantime, fundamental factors are likely to continue impacting Tesla’s profitability and subsequently its stock.