Tesla Slumps as Demand Crumbles

Is the EV king building to something other than structural decline? 

BREAKING NEWS

Tesla shares are getting battered in early trading thanks to a mild revenue miss and fears around declining demand. Let’s break down Tesla’s ongoing slide:

WHAT HAPPENED

Tesla managed to beat expectations in a few small ways. The company got margins more under control, generating an operating margin of 8.2%. Thanks to price cuts, that’s still a huge draw down from last year’s 16% operating margin—but at least things are improving from Q3. 

Tesla missed both top and bottom-line expectations by driving a $0.71 EPS from $25.1 billion in revenue for the quarter. While the company is pushing in the right direction as they improve auto margins—investors need to see a lot more from the company in order to justify Tesla’s high valuation.

PARTY LIKE IT'S 2014

The main headwind pushing investors out of Tesla stock this morning is fear surrounding lower volume. Industry-wide, demand for EVs appears to be hitting a ceiling, and Tesla’s price cuts simply aren’t enough to keep that demand alive. Elon Musk and Tesla Management are focusing on launching their “next generation vehicle” in Texas right now. Tesla’s next iteration is expected to be cheaper and more for mass-market adoption. 

Meanwhile, Tesla’s energy division managed to grow  54% YoY and is quickly scaling. That revenue doesn’t even come close to replacing vehicle shortfalls, but it at least provides some long-term optimism for Tesla’s growth prospects. 

WHY IT MATTERS

After years of hitting a high bar for margins—Tesla is simply being held to a higher standard than other companies. Tesla is still investing in R&D like interest rates are below 1%—and that’s having a huge impact on their margins. Tesla would be enjoying much higher valuations right now if they simply announced a broader cost-cutting program or moved to utilizing cloud services for AI instead of building their own array in-house.

Instead—Tesla is plowing ahead with very a expensive development cycle hitched to very large bets like a 100% vision-based Full Self Driving algorithm and the Optimus robot. This period of weakness would be worth it if any one of these bets even mildly pays off—but the market just isn’t here for that level of risk right now. Tesla stock slumped over 8% in early trading, meaning the company has now fallen 20% on the month.