Tesla's hopes and worries, why has it continued to slump over the past year?

Key points:

① ARK Fund currently holds nearly US$800 million in Tesla shares, and Tesla has become the largest holding of its ARKK fund. This shows that Sister Mumu’s confidence in its future has not diminished. She believes that it is only a matter of time before Tesla returns to the throne.

② The major market value fluctuations in Tesla’s history are closely related to the official introduction of its strategic products to the market. However, the actual progress of new businesses (autonomous driving, rental cars, etc.) is not clear at present. In addition, the recovery of delivery growth in 2024 is far away, and there is a lot of pressure to return to the upward cycle.

③ With the postponement of cheaper models and the inability of Cybertruck to make a meaningful contribution to performance growth in the short term due to production capacity factors, Tesla is betting too many possibilities on not being fully prepared. Good FSD and the yet to be launched Robotaxi robot taxi business.

"I do see a path for Tesla to potentially become the most valuable company in the world one day. I believe it's not an easy path, in fact it's very difficult, but it is now It’s possible, and I had never had such an idea before.”

This is a sentence Musk mentioned repeatedly during Tesla’s earnings call last quarter. He previously said that Tesla’s market value in the next five years may exceed that of Apple and Saudi Aramco combined.

But the reality is not satisfactory. Tesla’s stock price has fallen more than 20% since its last earnings report. It has fallen nearly 40% in 2024, and its latest market value fell below $500 billion. In addition, the company is also conducting global layoffs of no less than 10%, and several senior executives have chosen to leave.

In times of turmoil, Cathie Wood, a well-known fund manager who has long been particularly fond of growth stocks, chose to believe in Tesla and frequently added positions.

According to ARK Fund’s disclosure, Tesla has once again become the largest holding of its nearly 10 billion flagship fund, ARKK. It currently holds $727 million in Tesla shares, accounting for 9.85% of ARKK’s weighting (very close to the default limit of 10% for a single holding), surpassing Coinbase’s 9.11% weighting. This shows that Sister Mu’s confidence in Tesla’s future has not diminished. She believes that it is only a matter of time before Tesla returns to the throne.

Will Tesla break away from the ranks of tech giants? When will it regain its glory? The RockFlow investment research team has conducted in-depth research on the history of its stock price fluctuations, the reasons for its downturn in performance over the past year, and the recent controversies related to Model 2 and Robotaxi. We believe that Tesla’s business is resilient enough, although it has experienced a period of decline. The stock price has languished due to industry cycles, but it remains hopeful.

1. The driving force behind Tesla’s stock price rise

Looking back at the past, Tesla’s major market value fluctuations are closely related to the official launch of its strategic products to the market:

2013-2016: Tesla was a luxury carmaker based at the high end of the market with its high-priced Model S and X. Similar to brands like BMW and Mercedes-Benz, Tesla has focused on stylish, high-end electric sedans and SUVs during this period. At that time, Tesla’s market value was only about $30 billion.

2017: The launch of the Model 3 to the mass market in July 2017 fueled Tesla’s first significant increase in market capitalization. By demonstrating its ability to produce affordable mid-range electric vehicles, the market believes Tesla has the potential to disrupt the broader electric vehicle market.

Early 2020: The mid-sized Model Y SUV was launched in March 2020. This more affordable electric SUV expanded Tesla’s addressable market size and drove its market value to rise for the second time to $400 billion, far away It exceeded the US$200 billion of Toyota, the number one player in the industry at the time.

Mid-2020: The launch of Fully Self-Driving (FSD) testing and robotaxi programs in September 2020 helped Tesla’s market value rise sharply for the third time to $800 billion by the end of 2020. Thanks to the further expansion of the total potential market, investment banks such as Morgan Stanley are very optimistic about Tesla's development prospects.

But then, FSD did not land as soon as possible, and the market value of shared travel giant Uber was only US$60-100 billion at the time, making the market realize that these two new businesses alone could not sustain an increase of US$400 billion. . Tesla’s market value has experienced a relatively obvious short-term correction.

2021: In October 2021, the US car rental giant Hertz announced an order for 100,000 Tesla cars. As soon as the news came out, Tesla's stock price soared that day, and its market value exceeded US$1 trillion.

At this time, Tesla is in high spirits, and the bright prospects for electric vehicles, energy business, autonomous driving and robot taxis all look quite attractive. But the subsequent reality shattered investors' good hopes, and Tesla's stock price ushered in a year-long correction until it rebounded in early 2023.

At present, the difficulties in 2024 are just the unfavorable continuation of the rebound in performance in 2023. After all, it is not clear that autonomous driving, rental cars, and Cybertruck pickups will substantially boost performance. In addition, the expected recovery in auto sales growth in 2024 is far away, and Tesla is under great pressure to return to the upward cycle.

2. Why has the market continued to be depressed in the past year?

Tesla’s weak performance is not just a problem in the latest quarter. The financial data in the past few quarters have also been unsatisfactory. What worries the market most is that Tesla's deliveries in the first quarter of this year fell by about 9% year-on-year and 14% lower than expected. This is the first quarterly sales decline since the 2020 epidemic.

Why is Tesla’s first-quarter delivery data so unsatisfactory? To be fair, there are three core reasons:

First of all, this can be attributed to the historic interest rate hike cycle. Car sales are cyclical, and interest rate levels will directly affect consumer demand for cars. If the interest rate cut comes early and the auto cycle picks up, Tesla's performance is expected to improve significantly.

Secondly, the more intense competitive environment in recent quarters (especially in the Chinese market) has led to a phased saturation of the electric vehicle market. Given that electric vehicles are still an emerging industry, more public charging infrastructure, cheaper and more diverse car models, and continued range upgrades can further open up demand (the adoption of Tesla charging standards by multiple automakers is a positive sign) .

Finally, some temporary factory closures and maintenance have increased Tesla's short-term production and delivery pressure, and related news has dampened positive market sentiment to a certain extent.

It is worth noting that Tesla’s U.S. business severely dragged down overall deliveries in this quarter. The chart below shows Tesla’s quarterly delivery data by region. The U.S. market, which accounts for the largest share, fell the most year-on-year:

And because the United States accounted for 32% of global pre-tax profits last year , the RockFlow investment research team predicts that this may have a huge impact on the upcoming first-quarter earnings.

But to be fair, electric vehicles are facing difficulties across the entire industry, and Tesla is not the only one that has given low scores. Although it "only" delivered about 387,000 cars in 24Q1, Tesla still regained the title of "the world's largest electric vehicle manufacturer" - it had previously lost to BYD, but this quarter, the latter's delivery volume fell more sharply. Large, up to 42%.

In addition to the year-on-year decline in deliveries, Tesla also revealed to the market that its car sales growth in 2024 will also be "significantly lower" than in 2023, indicating that a sales recovery is far away. In addition, another thorny problem it encountered was the continued decline in profit margins caused by price cuts.

Tesla’s profit margins have historically been ahead of other automakers, mainly due to three factors:

1) Economies of scale (the importance of several Gigafactories to Tesla Self-evident);

2) Bypassing dealers and facing consumers directly (online and offline direct stores);

3) Low marketing costs (Tesla previously Advertising budgets remain extremely low).

Due to the long-term lack of new models, in order to prioritize sales and growth, Tesla has no choice but to continue to cut prices in the short term to stimulate demand, so the profit margin data is very ugly.

Of course, bulls can believe that Tesla intends to continue cutting prices in order to make it more difficult for rivals to compete in an environment with higher capital costs. When the headwinds abate and growth accelerates again, Tesla will gain greater market share. And, while it accepts lower upfront profits now, it will reap more profits in the future through software upsells such as FSD fully autonomous driving.

But at the same time, the opposing view of the bears is also very clear: Tesla's price cuts may lead to a long-term decline in its own profit margins due to intensified competition throughout the industry. Especially in Europe and China, other lower-cost companies are catching up, and Tesla's pricing power may weaken in the long term.

The following figure shows the changes in Tesla’s market share in the three major regions of North America, Europe, and China over the past six years. Obviously, its share growth has become very slow in recent quarters:

But overall, Tesla is still the leader in the field of electric vehicles in terms of market share and profitability. Relatively solid fundamentals have not changed in 2023.

3. When will Tesla return to the throne?

Not long ago, a Reuters report caused Tesla’s stock price to fluctuate. It stated that Tesla was giving up its $25,000 economy car (Model 2).

Considering that this low-cost electric vehicle is highly anticipated, and the market has included its profit growth expectations to a certain extent. As a result, Tesla shares were sold off as soon as the news came out, with the stock price falling nearly 6% at one point.

Thirty minutes later, Musk tweeted that "Reuters lied again," a statement that helped recoup some of the losses and sent Tesla's stock price higher. But it still ended the day down 3.6%.

49 minutes later, Musk tweeted again, "Tesla Robotaxi will be officially unveiled on August 8."

This news caused the stock price to rise 3.8% after hours, and fans were very excited. But it has also caused some investors to question:

First, if Reuters really publishes the rumor, will Musk urge Tesla’s legal team to threaten prosecution?

Second, if Robotaxi was ready to debut, why not announce it in mid-March when Tesla's stock price hit dangerous lows, but wait until after Reuters published the aborted plan for the new car?

One possibility is that Musk was so shocked by the negative market reaction to the Reuters news that he decided to fight back, and therefore acted less cautiously than his team had originally intended. He's clearly trying to shift the focus away from Tesla's deteriorating automotive business and toward the company's new positioning of "AI/robotics."

For Musk, this also means that the details of Robotaxi cannot escape the questioning of analysts during the new quarter earnings call on April 23.

Reuters reports on Tesla’s cancellation of the Model 2 came from multiple sources, most of which are suppliers. Given that parts suppliers for new car models from automakers need to be involved in research and development about 2 to 3 years before the new car is launched on the market. It is conceivable that this news has a high degree of authenticity.

On the other hand, why does the market pay so much attention to the low-cost Model 2? Because it is crucial to solving Tesla's immediate priority-boosting the profit margins of its automotive business.

The picture below is the estimated price, cost, profit and other comprehensive data of Model 2 VS Tesla’s existing models:

The data in the above picture is revealed Three key points:

First, Model 2 is expected to sell for $25,000, with expected annual sales exceeding 500,000 units, and an estimated gross profit margin of 22%;

Second, through innovative production In terms of manufacturing process, the production cost of Model 2 is expected to be 50% lower than that of Model 3 and Y;

Thirdly, it is expected that the annual sales of 500,000 Model 2 will bring in a gross profit of US$2.7 billion. This means that although the profitability of Tesla's existing old product lines has dropped significantly, the overall profitability will be significantly improved by the Model 2.

Obviously, this is quite important for Tesla, which has not launched a mass model for many years.

In hindsight, it may have been a mistake for Tesla to prioritize the launch of the Cybertruck rather than focus on the next generation of cheaper, mass-market vehicles. It's cool to bring the Cybertruck to the market, but the market space for this model is not large enough, and due to production capacity factors (expected to produce 250,000 vehicles per year), it cannot make a meaningful contribution to Tesla's performance growth in the short term.

And all of this has ultimately led to Tesla betting too many possibilities on FSD, which is not fully ready so far, and the Robotaxi robot taxi that has not yet been released.

We believe that if the FSD and Robotaxi stories are confirmed, Tesla is expected to benefit from car sales and recurring ride-hailing revenue streams, and even generate "subscription software"-like profits. This is why Cathie Wood believes that Tesla is carrying out the world’s largest artificial intelligence project through autonomous driving. The entire ecosystem of robot taxis does have the potential to create trillions of dollars in revenue, and by then, Tesla, as a platform supplier, will be the biggest winner.

When will this future come? What surprises will Robotaxi bring to the market? We'll see.

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