End of Year Outlook: Is It Time for Investors to Re-evaluate TSLA Stock?


Tesla, Inc. (TSLA) employees initiated a strike in late October when approximately 120 mechanics at 12 TSLA repair shops in seven cities across Sweden protested against TSLA's refusal to endorse a collective bargaining agreement.

Continuing ripple effects were seen across various segments – from custodial and dock workers to postal employees and metalworkers. Sympathy strikes ensued, disrupting the company's operations from unloading vehicles off boats and obtaining vehicle registration plates.

Sweden, boasting one of Europe's most powerful labor movements, stands as the stinging backdrop. The strike is seen as a clash between the Swedish and American ways of doing business and a fight to protect the Swedish union model, covering about 90% of its workforce.

Employees and employers unanimously support this system. This universal approbation is warranted given that the Swedish labor relations model has maintained relative industrial tranquility between corporations and wage earners for decades.

TSLA, on the contrary, is known for opposing unionization in its workplaces and has a different corporate culture and vision. Elon Musk-led TSLA may have inadvertently chosen a contest difficult to win by retorting against this norm. What began as a localized dispute has now escalated to potentially considerable global implications.

Casting wider ripples, there are projections for the labor movements and automotive workers within Europe and extending to the U.S. Arturo Vasquez, an ombudsman in the IF Metall union – the largest in Sweden, has reportedly reached out to counterparts across Europe and the U.S. With this, he aims to gather support, possibly leading to similar moves in their respective domains.

According to car.info data, TSLA reportedly registered 1,516 new cars in November, representing a sales increase of 175.2% year-over-year. This performance is particularly noteworthy given the mounting efforts of IF Metall against the EV manufacturer.

Furthermore, TSLA aims to maintain a growth rate of 50%, with aspirations to sell 2.7 million vehicles by 2024. The automaker plans to augment its production capacity across Fremont, Shanghai, Berlin, and Texas facilities. Additionally, the company aims to enhance its product range and features, including introducing new models – like Model 3 Highland and Model S Plaid, with Cybertruck recently added to the lineup.

However, with no signs of an impending agreement between TSLA and IF Metall, the ongoing strike could disrupt TSLA's ambitious objectives. In September, EVs constituted a 63.4% market share in Sweden, an increase from last year's 55.2%. TSLA’s Model Y was the top-selling vehicle in Sweden year-to-date, underscoring its dominant stance.

The strike could compromise TSLA's market share and customer loyalty in Sweden and other Nordic countries, where the brand has a substantial presence and exciting demand prospects. It could impact the delivery and service of TSLA vehicles, thus potentially undermining the brand's reputation in the region.

TSLA recently filed a lawsuit against the Swedish state via Sweden's Transport Agency due to a strike by postal workers that halted delivery of license plates for the automaker's new vehicles, creating additional regulatory hurdles. The company could face fines, sanctions, or injunctions, which could dent the company’s profitability.

Moreover, TSLA's global supply chain and production network could experience disruptions and delays, affecting the availability and quality of components. Expansion of operations and facilities might also face challenges.

Furthermore, TSLA's capability to attract and retain talent, particularly in Europe, where the company is aggressively investing and recruiting, could be impacted. It could further hamper the morale and motivation of TSLA’s existing employees. Consequently, this could blemish TSLA’s image as a leading pioneer in the EV and clean energy industry, thereby lessening its allure to investors and partners.

Since the issue is unlikely to dissipate soon, the company may experience a downturn in revenue and profit, along with muted growth prospects, thus potentially leading to a fall in its share price. The projected declining cash flow and profitability could impede the company's ability to invest in new ventures and innovations.

Over the past five years, TSLA's impressive rally has resulted in a robust return of over 900% for its shareholders, equivalent to some investors' lifetime returns. Nevertheless, its lofty valuations have set the bar high for expectations.

TSLA has historically foregone dividend payments, choosing instead to reinvest profits into the organization to fuel future growth. While some analysts and investors anticipate it could begin issuing dividends as the company matures and turns profitable, the ongoing strike and its impacts could delay or even nullify these possibilities due to declining cash flow and earnings.

Let’s look at some that may prompt investors to proceed with caution:

Deteriorating Financials

Although TSLA’s revenue grew 9% year-over-year to $23.35 billion in the third quarter of 2023, the company’s total gross profits fell 22% year-over-year. Its non-GAAP net income declined 37% from the year-ago quarter to $2.32 billion despite robust Model 3 and Model Y sales.

Despite a 9% year-over-year revenue increase to $23.35 billion in the third quarter of 2023, TSLA’s total gross profits declined 22%. This decline was accompanied by a 37% decrease in non-GAAP net income to $2.32 billion despite robust sales from Model 3 and Model Y vehicles.

According to Cox Automotive, TSLA’s market share fell to the lowest ever at 50%, a stark contrast from the previous year's near 65%. Furthermore, the firm does not project any imminent revenue surge following the Cybertruck launch.

Price Slashing

TSLA initiated a competitive pricing battle earlier this year, sparking enthusiasm among industry observers who perceived it as a manifestation of its production efficiencies. However, the company later confirmed that this strategy was primarily demand-driven.

Implementing over six decisive price reductions across its four vehicle models unequivocally demonstrates that the market competition is intensifying, and customer demand is not keeping pace with the company's inventories.

This dynamic is unfavorable and offers a cogent explanation as to why TSLA's operating margin substantially shrunk to 7.6% in the third quarter, down from its prior-year quarter level of 17.2%.

Unfavorable Analyst Estimates

Analysts expect TSLA’s revenue for the fourth quarter (ending December 2023) to come in at $25.62 billion, suggesting an increase of 5.1% year-over-year. However, the consensus EPS estimate of $0.74 for the quarter reflects an alarming 38.1% year-over-year decline.

Moreover, for the fiscal year 2023, the company’s EPS is expected to decrease 21.4% year-over-year to $3.20, while revenue is expected to come at $97.31 billion.

Bottom Line

Over the previous decade, TSLA has emerged as one of the top performers on the expansive S&P 500, delivering massive returns.

The company's robust progress has positioned it among the most significant publicly traded bodies, boasting an immense market cap of approximately $763 billion. As such, TSLA secured a crucial position in the so-called 'Magnificent Seven,' significantly driving the broader market to greater heights in 2023.

Furthermore, the automaker is looking to broaden its revenue streams beyond the traditional sales and leases of EVs. There lies a sizeable opportunity for TSLA to amplify its profit margins by selling full self-driving subscriptions.

Moreover, TSLA's presence within the energy storage sphere continues to expand, with the company poised to become the principal supercharger network provider for EVs across the U.S.

Despite the laudable accomplishments of Elon Musk as a leader and innovator, there are concerns regarding the potential pitfalls of his management style. Notably, there has been criticism surrounding persistent issues with adhering to initially set timelines, which cast shadows of doubt moving forward. The ongoing strike adds to the woes.

Concurrently, the company faces financial headwinds with high-interest rates, a facet exacerbating financing costs and suppressing consumer discretionary purchasing behavior. TSLA’s assertive actions toward price reduction in response to weakened demand and intensifying competition have failed to resonate as intended.

Moreover, TSLA's non-GAAP forward P/E multiple sits at a lofty 75.04, significantly surpassing the industry average of 14.87. Should TSLA's market cap decline to meet this industry average, shareholders may find their confidence dented considerably.

Additional trepidation stems from analyst skepticism surrounding the company's prospects. This is a concern for current or potential investors considering TSLA stock. Therefore, investors may wish to reassess their stance before investing in the stock.