The boost to renewable energy and electric vehicle stocks that we saw in the fourth quarter was short-lived. Tesla has not been immune either, having plummeted since the beginning of the year after reporting accounts that missed targets on all key metrics. Earnings, revenues and gross margins have been poor and the 2024 sales warning has not helped investor sentiment.
In the meantime, Tesla has left the “Magnificent 7” club and it seems that the company is not shying away from adding to its self-inflicted wounds, as witnessed by statements by Elon Musk who has raised doubts about its governance and board of directors. Then yesterday, a Delaware judge put Musk’s fortune in doubt, rejecting the record $55.8 billion package that Tesla’s board had approved for its chief executive in 2018.
Slowing demand, holding margins
The entire sector has been hit by a combination of slowing demand for electric vehicles, concerns about affordability and an increase in Chinese exports. In all of this, investors’ attention is now focused on holding margins, given that a price war is underway between the big names in the sector that, at the moment, is not rewarding anyone. Tesla has cut prices in China and Europe to stimulate demand and try to regain the crown of queen of electric vehicles, lost at the beginning of the year to BYD. In turn, the Chinese giant has missed its earnings targets due to the strong end-of-year discounts implemented to meet sales objectives.
The negative effects of price wars
This dynamic has been observed before in sectors such as telecommunications, highlighting how price wars, while they can generate short-term gains in market share and sales, can lead to lower overall profitability for the sector. However, these segments still have the potential to be winners in the high-risk year. Valuations have been transformed by the price collapses of recent months, demand is still growing rapidly, while interest rate cuts, although not immediately, are on the way.
Help comes from falling battery costs
We believe the EV glass remains half full. Battery costs have fallen, along with lithium prices, while global EV growth is set to exceed 30% this year, led by the United States. The long-term upside is clear. The outlook also seems to be smiling on Tesla, however, given its investments in artificial intelligence and developments in its solar energy business.
There’s something odd with the Growth: 2019-2023
Phenomenal growth between 2019 and 2023, maybe a little too much to be organic. We saw stocks of EV companies far outperforming general stock markets and even major traditional automakers. For those unfamiliar, understanding what is trading is key to grasping the future of alternative energy cars, in an environment highly influenced by political factors and the fluctuating sentiment of consumers. In this context, any stock undergoes strong volatility, this is a fact that applies to all products. By now, disappointing the market and investors with the accounts is becoming a habit for Tesla. Even in the second quarter of 2024, the queen of electric cars suffered from a demand that remains weak and competition on the markets that continues to increase. The result is falling sales, increasingly falling profits and below Wall Street expectations and margins that are still compressed. After reporting the accounts on the night of July 23-24, in the after hours the stock lost almost 8%.
Tesla increases revenues but not on cars
In the second quarter, Tesla brought revenues to 25.5 billion dollars, still higher than the 24.77 billion consensus and up 2% compared to a year earlier, but supported in part by 890 million dollars in regulatory credits, those that it sells to other car manufacturers trying to meet emissions obligations. For the second consecutive quarter, however, Tesla, which must guard against the comeback of Chinese rival Byd that is challenging it for global primacy in electric cars, recorded a drop in sales and automotive revenues fell 7% to 19.9 billion, from 21.27 billion a year ago.
Profits fall 45% and margins fall
The problem is that the fact that the company’s global sales of electric vehicles have fallen further despite price cuts and low-interest financing has caused net profit to fall to 1.48 billion between April and June compared to 2.7 billion in the same period of 2023. That means -45%. Adjusted earnings per share were therefore 52 cents, against the 62 cents expected by experts. And profitability is crumbling: the gross profit margin, the percentage of revenue that it keeps after expenses, fell once again to 18%, but it was at 29.1% in the first quarter of 2022. The adjusted EBITDA margin stopped at 14.4% against 15.9% in the first quarter and 18.7% a year ago, while the operating margin fell to 6.3%, a little better than the 5.5% of the previous quarter but much less than the 9.6% a year ago.
Tesla loses market share from China to the US
At the beginning of July, Tesla announced that it had sold 443,956 vehicles from April to June, down 4.8%. Although sales were better than the 436 thousand expected by analysts, the decline still confirmed the weakening of demand for electric cars in general but probably also for the Tesla product range, awaiting renewal. Musk’s company loses market share in China, where competition is higher, but also in Europe and the United States.
New cars and a $25,000 model
In a note, Tesla explained that it is between two major waves of growth, with the next one coming through advances in autonomous vehicles and new models. However, Musk’s company reiterated that sales growth “could be significantly lower than the growth rate achieved in 2023”. The company confirmed plans for new vehicles, including more affordable models, with production starting in the first half of next year. Tesla hinted at a smaller model that will cost around $25,000.
Conclusions
The feeling is that nothing will ever be the same again. Also because it would be counterproductive. The car market continues to travel with the lights off and in open countryside, while in Europe the doubt is spreading that a certain part of the Green New Deal needs to be rewritten, with Italy busy asking for the postponement of the deadlines to retire diesel and petrol. The numbers, on the other hand, leave no room for too long reflections. In August, according to data from ACEA, the association of European manufacturers, new car registrations in the European Union were 755,717, 18.3% less than in the same period in 2023.
The negative results came from all four main markets, especially from Germany, once a symbol of European supremacy in the car industry and now mortally wounded by the Volkswagen case. Registrations collapsed in Germany (-27.8%), France (-24.3%) and Italy (-13.4%). But the shocking data is that of the electric market. Last month, registrations of battery-powered electric cars fell by 43.9% with their total market share falling to 14.4% from 21% the previous year.
Narrowing the focus on electric, one wonders whether it is legitimate to talk about the end of the myth of the green car, at least in the Old Continent. The madness is all there, we have based the entire ecological transition on green cars, pushing the car industry to make huge investments and thus sending the entire sector into a tailspin. Because apparently the electric car does not seem to be too welcome. The problem is this, there was a mature, almost saturated car industry, which was asked for billions to invest in electric cars: but if the same billions are not given to consumers, then they will not buy battery-powered cars. And here is the perfect storm, car manufacturers are in the middle of a hurricane.