Tesla’s plunge drags valuation below US$500 billion on margin fear
TESLA shares extended their brutal sell-off, pulling the company’s market valuation below the key half-trillion dollar mark as investors increasingly fear its price-cutting plan will eat into profits.
The stock price on Wednesday (Apr 26) fell as much as 3.5 per cent to US$155.03 in New York and is on pace to close at the lowest level since Jan 25.
If the decline holds until the end of the regular session, the company will have lost more than US$70 billion from its market capitalisation over five trading sessions since posting disappointing earnings.
The shares are down more than 25 per cent in April alone.
Tesla on Thursday reported first-quarter results that missed analysts expectations on nearly every metric. Most significantly, profit margins plunged, displaying the impact of the company’s aggressive price-cut strategy.
Investors were particularly rattled by chief executive officer (CEO) Elon Musk indicating that Tesla will keep lowering prices to coax potential buyers of its vehicles.
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“Despite significant price cuts, demand still appears challenged for Tesla and price elasticity appears to be more muted than Tesla believed,” Bernstein analyst Toni Sacconaghi wrote in a note on Thursday. “We maintain that price cuts have and will undermine industry profitability (including Tesla’s), but that incumbents are deep pocketed and not likely to back down.”
The results sparked a flurry of price-target reductions by Wall Street analysts, who pointed to the risks to Tesla’s premium valuation amid a steep erosion in profit margins.
The company’s hefty margins are often cited by bulls as one of the key reasons why the stock deserves to trade at a much higher multiple than rival automakers.
Tesla shares have been on quite a journey this year. After ending 2022 with a steep 65 per cent plunge that pushed its valuation to around US$340 billion in early January, the stock rallied rapidly for two months and the company’s market capitalisation ballooned to more than US$670 billion.
But that optimism faded in early April after the Q1 delivery numbers showed the price cuts were not increasing demand as much as expected. Then, the full results reported last week made the point even clearer.
Meanwhile, oil major Exxon Mobil is breathing down the electric-vehicle maker’s neck on the S&P 500 leader board, as it is set to rise above the US$500 billion milestone for the first time since 2007.
Luxury-goods behemoth LVMH is in the race as well.
The companies trading places, temporarily or not, highlights the higher volatility in Tesla shares. One reason could be the company’s premium valuation – the stock trades at 42 times its forward earnings, compared to Exxon’s 12 and LVMH’s 25 – leaving little margin for error.
Still, optimists remain, as some on Wall Street see the sell-off as a temporary blip brought on by wider macroeconomic pressures. In the longer term, they say, Tesla’s still-high margins can leave it better positioned than peers to weather this storm.
For example, Cathie Wood, an ardent Tesla bull and the CEO of Ark Investment Management, said in an interview with CNBC last week that her 2027 price target for the stock is US$2,000.
“While sceptics may focus on less than 20 per cent automotive gross margin, we think an obsession with this metric is unwarranted,” Piper Sandler analyst Alexander Potter wrote in a note. “Once the dust settles, Tesla should bounce back.” BLOOMBERG
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