Investors are reassessing the premise that justified Tesla’s astronomical share 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 dominates online retail.
But Tesla shares are down more than 40 percent since April 4, a much steeper drop than the broader market, vaporizing more than $400 billion in market value. And the drop has drawn attention to the risks facing the company. These include increased competition, a shortage of new products, lawsuits accusing the company of racial discrimination and significant production problems at Tesla’s Shanghai factory, which it uses to supply Asia and Europe.
Musk has not helped the stock price by turning his offer to buy Twitter into a financial soap opera. His antics have reinforced the perception that Tesla lacks an independent board of directors that could prevent it from doing things that could damage the company’s business and brand.
“From a corporate governance perspective, Tesla has a lot of red flags,” said Andrew Poreda, a senior analyst who specializes in socially responsible investing at Sage Advisory Services, an investment firm in Austin, Texas. “There are almost no checks and balances.”
Even longtime Tesla optimists have doubts. Daniel Ives, an analyst at Wedbush Securities, has been one of the staunchest believers in Tesla on Wall Street. But on Thursday, Wedbush lowered its price target for Tesla, the company’s estimate of the stock’s fair market value based on future earnings, to $1,000 from $1,400. Ives cited Tesla’s troubles in China, where lockdowns have reduced the supply of crucial parts and materials and the demand for cars.
“There is a new reality for Tesla in China and the market is reassessing the risks,” Ives said.
Production problems in China have undermined one of the foundations for making Tesla the most valuable car company in the world. Tesla vehicles have been a hit with Chinese buyers, fueling hopes of supercharged growth in the world’s largest car market. Tesla’s market share in China topped 2.5 percent in the first quarter of 2022, closing in on luxury carmakers Mercedes-Benz, BMW and Audi.
But supply chain headaches in China are being compounded by declining consumer demand, said Michael Dunne, chief executive of ZoZoGo, which advises companies in the electric car market.
Chinese consumers “are nervous, they are worried about the future,” Dunne said. “It’s a double whammy that Tesla is facing in China.”
Tesla shares are reacting in part to the same forces that are rattling stock markets around the world: the war in Ukraine, rising interest rates, the threat of recession, supply chain chaos and the rising inflation. But Tesla shares have fallen much more than those of other Silicon Valley giants such as 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 technology and software. But two models, the Model 3 sedan and the Model Y sport utility vehicle, accounted for 95 percent of Tesla’s sales. Your next consumer vehicle, a pickup truck, has been delayed many times and isn’t expected until next year at the earliest.
It is an axiom in the auto industry that new models drive sales. And competition from Hyundai, Ford and Volkswagen is growing, giving drivers much more choice.
Jesse Toprak, an auto industry veteran who is chief analyst at Autonomy, a company that offers subscription electric cars, said Tesla’s market share will fall below 40 percent by the end of 2023, though its sales will continue to grow. as the general market. it expands
“They will have a smaller portion of a larger pot,” Toprak said. “But their near monopoly on electric vehicle sales in the US will slowly wane.”
Tesla already faces stiff competition in Europe, where electric vehicles account for 13 percent of new car sales. That foreshadows what could happen in the United States, where battery-car sales are just beginning 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, just behind 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 see Musk as a visionary and are willing to wait months or years for company cars.
But as electric cars gain popularity due to skyrocketing gas prices, the next wave of customers may not be as tolerant or as enamored of Musk. “The next generation of buyers will be average people who buy electric vehicles because it makes financial sense to them,” Toprak said. “Tesla’s brand image will be less useful.”
Tesla’s image is under pressure in ways that could hurt the automaker among the politically liberal and environmentally conscious customers who have long been its largest customer base. The California Department of Fair Employment and Housing is suing Tesla, accusing it of allowing racial discrimination and harassment to flourish 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, ousted Tesla last month. S&P said it was concerned about allegations of racial discrimination and poor working conditions at the company’s Fremont factory.
Musk responded to S&P’s decision by writing on Twitter that the movement to apply environmental, social and governance standards to corporations is a “scam” that “has been put together by fake social justice warriors.”
Musk followed up that Twitter post by declaring that he would switch his allegiance from the Democratic Party, which he said had “become the party of division and hate,” and would now vote Republican. Politically charged statements like that are sure to alienate some car buyers.
“The more political it gets, the more it could start to sway buyers,” said Carla Bailo, executive director of the Center for Automotive Research in Ann Arbor, Michigan.
Musk and Tesla did not respond to requests for comment.
Management turnover is another risk. Musk is a notoriously demanding boss who has warned Twitter employees that “work ethic expectations would be extreme” if he takes over the social media platform.
The rotation in Tesla is obvious. Many of his former senior managers are prominent in the startup scene in the San Francisco Bay Area. Examples include Celina Mikolajczak, head of manufacturing at startup battery maker QuantumScape, who previously helped develop batteries at Tesla, and Gene Berdichevsky, another former Tesla battery developer who is CEO of Sila Nanotechnologies. Sila announced this week that it would supply advanced battery materials 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 go on a full charge, was founded by Peter Rawlinson, a former senior Tesla engineer until he fell out. with Musk. Lucid’s headquarters are in Newark, California, a short drive from the Tesla factory in Fremont.
Musk’s fans say he has helped promote emission-free vehicles by seeding talent in the industry. But critics see the risk that Tesla may never develop a stable echelon of experienced managers who can run the company if something happens to Musk.
“You can’t treat workers badly in a tight labor market like ours,” said Mr. Poreda of Sage Advisory. “A brilliant man cannot make his vision come true without a lot of really smart people.”
Amid this litany of problems and risks, Musk has been spending time acquiring Twitter, though he seems to have second thoughts about the deal lately. The foray into social media has some investors wondering why the boss spends so much time writing missives on Twitter while the world burns.
“There’s a feeling,” said Wedbush’s Mr. Ives, “that the pilot of the plane is watching a Netflix show while you’re going through a massive thunderstorm.”