Investors are reassessing the premise that justified Tesla’s astronomical stock price and made its founder, Elon Musk, the richest person in the world.
Tesla’s $1 trillion valuation only made sense if investors believed the electric car company was on track to dominate the auto industry the way Apple rules smartphones or Amazon orders online retail.
But Tesla shares are down more than 40% since April 4 — a much steeper drop than the broader market, vaporizing more than $400 billion in market value. And the fall drew attention to the risks the company faces. These include growing competition, a shortage of new products, lawsuits accusing the company of racial discrimination and major production problems at Tesla’s Shanghai factory, which it uses to supply Asia and Europe.
Mr. Musk did not help the stock price by turning his offer to buy Twitter into a financial soap opera. His antics reinforced the perception that Tesla doesn’t have an independent board that could stop him from doing things that could harm the company’s business and brand.
“From a good corporate governance perspective, Tesla has a lot of red flags,” said Andrew Poreda, senior analyst specializing in socially responsible investing at Sage Advisory Services, an investment firm in Austin, in Texas. “There are almost no checks and balances.”
Even longtime Tesla optimists have their doubts. Daniel Ives, an analyst at Wedbush Securities, is one of Tesla’s strongest supporters on Wall Street. But on Thursday, Wedbush lowered its target price for Tesla — the company’s estimate of the stock’s fair market value based on future earnings — to $1,000 from $1,400. Mr Ives cited Tesla’s problems in China, where shutdowns have strangled the supply of crucial parts and materials and demand for cars.
“There is a new reality for Tesla in China, and the market is reassessing the risks,” Mr. Ives said.
Production issues in China have undermined one of the justifications for making Tesla the world’s most valuable automaker. Tesla vehicles have been a hit with Chinese buyers, fueling hopes of supercharged growth in the world’s biggest auto market. Tesla’s market share in China topped 2.5% in the first quarter of 2022, closing in on luxury automakers Mercedes-Benz, BMW and Audi.
But China’s supply chain headaches are compounded by falling consumer demand, said Michael Dunne, chief executive of ZoZoGo, which advises companies on the electric car market.
Chinese consumers “are pissed off, they’re worried about the future,” Dunne said. “It’s a double whammy that Tesla faces in China.”
Tesla shares are reacting in part to the same forces rocking stock markets around the world: the war in Ukraine, rising interest rates, the threat of recession, supply chain chaos and soaring coronavirus. ‘inflation. But Tesla shares have fallen far more than other Silicon Valley giants like Apple or Alphabet, the company that owns Google.
Tesla accounted for three-quarters of electric cars sold in the United States last year. The company is several years ahead of its competitors in battery and software technology. But two models — the Model 3 sedan and the Model Y sport utility vehicle — accounted for 95% of Tesla’s sales. Its next consumer vehicle, a pickup truck, has been repeatedly delayed and isn’t expected until next year at the earliest.
It’s an axiom in the automotive industry that new models drive sales. And competition from Hyundai, Ford and Volkswagen is growing, giving drivers a lot more choice.
Jesse Toprak, an auto industry veteran who is a chief analyst at Autonomy, a company that offers electric cars by subscription, said Tesla’s market share will fall below 40% by the end of 2023. , although its sales will continue to grow as the overall market expands.
“They’ll have a smaller slice of a bigger pot,” Toprak said. “But their virtual monopoly on U.S. EV sales will slowly diminish.”
Tesla already faces stiff competition in Europe, where electric vehicles account for 13% of new car sales. This foreshadows what could happen in the United States, where battery car sales are just starting to take off. Volkswagen, which has invested heavily in electric vehicles, sold 56,000 battery cars in Western Europe in the first three months of the year, second only to Tesla, which sold 58,000, according to figures compiled by Schmidt Automotive Research in Berlin.
Tesla’s ability to serve the European market will improve as a new factory near Berlin ramps up production. In the United States and elsewhere, the company has benefited from fanatically loyal buyers who regard Mr. Musk as a visionary and are willing to wait months or years for the company’s cars.
But as electric cars grow in popularity due to soaring gas prices, the next wave of customers may not be as tolerant or as enamored of Mr. Musk. “The next generation of buyers will be average Joes who buy electric vehicles because it makes financial sense to them,” Toprak said. “Tesla’s branding will be less useful.”
Tesla’s image is under pressure in ways that could hurt the automaker among the environmentally conscious and politically liberal customers who have long been its biggest customer base. The California Department of Fair Employment and Housing is suing Tesla, accusing it of allowing racial discrimination and harassment to thrive at its factory in Fremont, California, near San Francisco. Tesla is contesting the lawsuit.
In another blow, the S&P 500 ESG Index, a list of companies that meet certain environmental, social and governance standards, ejected Tesla last month. S&P said it was troubled by allegations of racial discrimination and poor working conditions at the company’s Fremont plant.
Mr Musk responded to S&P’s decision by writing on Twitter that the movement to apply environmental, social and governance standards to corporations was a “scam” that “has been weaponized by fake social justice warriors”.
Mr Musk followed that post on Twitter saying he was switching allegiance to the Democratic Party, which he said had ‘become the party of division and hatred’, and that he would now vote Republicans . Politically charged statements like these are sure to alienate some car buyers.
“The more political it becomes, the more it might start to sway buyers,” said Carla Bailo, managing director of the Center for Automotive Research in Ann Arbor, Michigan.
Mr. Musk and Tesla did not respond to requests for comment.
Another risk is management turnover. Mr Musk is a notoriously demanding boss who has warned Twitter employees that “work ethic expectations would be extreme” if he took over the social media platform.
The turnover at Tesla is obvious. Many of its former senior executives are prominent in the San Francisco Bay Area start-up scene. Examples include Celina Mikolajczak, head of manufacturing at fledgling battery maker QuantumScape, who previously helped develop batteries at Tesla, and Gene Berdichevsky, another former Tesla battery developer who is managing director of Sila Nanotechnologies. Sila announced this week that it will supply materials for advanced batteries to Mercedes-Benz.
Lucid, maker of the only electric model to beat Tesla in Environmental Protection Agency tests of how far an electric car can travel on a full charge, was founded by Peter Rawlinson, a former top Tesla engineer until ’til he falls out with Mr. Musk. Lucid’s headquarters are in Newark, California, a short drive from Tesla’s Fremont factory.
Fans of Mr Musk say he helped promote zero-emission vehicles by sowing talent in the industry. But critics see a risk that Tesla will never develop a stable echelon of experienced managers capable of leading the company if anything ever happens to Mr. Musk.
“You can’t treat your workers badly in a tight labor market like ours,” said Mr. Poreda of Sage Advisory. “A brilliant man can’t realize his vision without a lot of really smart people.”
Amid this litany of issues and risks, Mr. Musk has spent time acquiring Twitter, although he lately seems to have doubts about the deal. The foray into social media has some investors wondering why the boss is spending so much time writing missives on Twitter while the world is burning.
“There’s just a feeling,” said Mr. Ives of Wedbush, “that the pilot of the plane is watching a Netflix show while you’re going through a huge thunderstorm.”
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