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Led by Elon Musk, Tesla (TSLA) is more than just an automaker; it is a technology company with ambitions that extend beyond electric vehicles (EVs) to energy storage, robotics, and artificial intelligence (AI).
Tesla is a member of the "Magnificent Seven," or the Mag 7 group, which refers to the seven mega-cap tech titans that have a significant influence on the stock market. While the other Mag 7 stocks have risen this year, Tesla has underperformed.
Despite dominating the EV market for years, Tesla has been scrutinized lately for its declining margins and deliveries. The stock has fallen 16.7% year-to-date, trailing the S&P 500 Index's ($SPX) 13.7% gain. Let's see if the popular Mag 7 stock can regain its footing.
What Is Going On With Tesla?
Tesla's main business is automobiles. It designs, manufactures, and sells electric vehicles. The company also manufactures solar panels and roof tiles that generate renewable energy for homes and businesses.
Tesla's stock has seen meteoric rises and falls, indicating both its disruptive potential and the cyclical nature of growth stocks. Despite facing pressured margins, the stock rose 101.7% in 2023, becoming one of the top-performing "Mag 7" stocks.
Globally, in the second quarter, Tesla delivered 443,953 vehicles, up from 386,810 in the first quarter. However, deliveries fell from 466,140 in the year-ago quarter.
Tesla met the revenue consensus estimate in Q2, but missed Wall Street's earnings estimate. Total revenue in the quarter increased by 2% to $25.5 billion, surpassing analysts' estimates by $759 million. Adjusted earnings per share fell 43% to $0.52, missing analysts' expectations by $0.10.
While Tesla generates revenue from energy generation and storage, services, and other sources, its automotive segment is the dominant business, accounting for approximately 78% of total revenue. In the second quarter, revenue from the automotive segment fell 7%, while revenue from energy generation and storage doubled. Perhaps investors' trust in the company is dwindling due to pressure on its core profit-generating business.
Management stated that the company provided competitive financing to offset the high interest rates that impacted revenue per unit in the quarter. After generating $2.5 billion in negative free cash flow in the first quarter, the second quarter FCF balance stood at $1.3 billion. Furthermore, as of the end of the quarter, Tesla had $30.7 billion in cash, cash equivalents, and investments. Management believes that this liquidity is enough to cover the company's "product roadmap, long-term capacity expansion plans, and other expenses."
The EV market is becoming increasingly competitive, with both traditional automakers and new entrants expanding their EV offerings. In the Q2 earnings call, CEO Elon Musk stated that competitors are heavily discounting their EV vehicles, making it difficult for Tesla. However, Musk sees this as a short-term issue.
Tesla's energy generation and storage business, while contributing a small portion of total revenue, is performing exceptionally well. Megapack and Powerwall resulted in 9.4 GWh of total storage deployments during the quarter. The energy storage backlog is strong, implying increased revenue in the coming quarters. Furthermore, management also mentioned progress is ongoing with the company's AI initiatives, but didn't specify what those were.
Tesla plans to launch its Robotaxi on Oct. 10. It also intends to offer Optimus robots to customers by 2026. Musk said, "The undertaking is massive, but I think the future is incredibly bright."
While these plans sound exciting, it may be years before they contribute to the company's financial performance. The short term still presents numerous challenges, including price cuts and lower sales volumes. Analysts that cover the stock expect revenue to increase by 2.8% in 2024, with a 23.1% dip in earnings.
What Does Wall Street Say About Tesla Stock?
Overall, on Wall Street, Tesla stock is a “hold.” Out of the 34 analysts covering TSLA, eight have a “strong buy” recommendation, one says it's a “moderate buy,” 17 rates it a "hold,” and eight say it’s a “strong sell.”
Despite the weak price action this year, Tesla stock has surpassed its average price target of $195.66. Its Street-high estimate of $310 suggests the stock could potentially rally by 50.3% in the next 12 months.
The Bottom Line on Tesla Stock
Tesla is not just an automobile company; it is a technology and energy innovator committed to transforming multiple industries through sustainable solutions. Its innovation-driven approach and lofty goals may continue to shape its future. However, due to intense competition in the EV industry and other macroeconomic pressures, the company may face challenges in the short term.
Furthermore, trading at 60 times forward 2025 earnings, Tesla stock seems overvalued. Analysts forecast 2025 earnings could increase by 36.8%. Perhaps this is the reason why analysts have mixed opinions about the stock. I agree with Wall Street’s opinion to hold on to the stock for now.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
