Four Facts Explaining Tesla's Crisis
From BBC News, April 26, 2024
Tesla is far from the time when it was one of Wall Street's favorite companies. Gone are the days when its market valuation exceeded $1 trillion at the end of 2021, and everything indicated that the electric car giant was invincible.
At that time, it was breaking production and delivery records, while its stock soared, placing the company among giants like Apple and Amazon.
Today, Elon Musk’s company, which he founded and runs as CEO, is facing major challenges that complicate its path in a highly competitive market.
Tesla’s sales, profits, market value, and the confidence of many shareholders in the company’s ability to innovate and grow long-term have all declined.
Chinese electric vehicle manufacturers have lowered their prices, impacting demand for Tesla cars, and Musk's recent announcement of layoffs has not been well received by the market.
Some of the company’s troubles began in October when Musk warned that demand was starting to slow.
When its main competitor, the Chinese giant BYD, overtook Tesla as the world's top electric car seller in the last quarter of last year, things were looking grim.
Announcements such as production cuts at the Shanghai Gigafactory and issues with the production of the Cybertruck and autonomous vehicles have not helped improve the mood.
Many analysts and investors believe that while building a fully autonomous vehicle is crucial for Tesla's future prospects, producing an affordable electric car is important for driving growth today.
This week, the news was not positive for the American company after the release of results that fell short of market analysts' expectations.
Since its founding in 2003, Tesla’s story has always been full of ups and downs. Many are wondering if this is another passing crisis or if the giant has reached a breaking point.
Here are four facts that explain the crisis the company is facing.
1. Layoffs
In mid-April, Tesla announced it would lay off more than 10% of its global workforce as part of a restructuring plan aimed at reducing costs and improving the company's position.
The internal restructuring, which follows years of rapid expansion and will affect around 15,000 employees, has raised concerns in the markets as it comes on top of a significant drop in vehicle deliveries since the beginning of the year.
“There’s nothing I hate more than this, but it has to be done,” Musk said.
Analysts from Gartner and Hargreaves Lansdown have suggested that these cuts signal cost pressure as the automaker invests in new models and artificial intelligence.
A few days ago, one of Tesla's top executives, Andrew “Drew” Baglino, announced via X (formerly Twitter) that he had made the “difficult decision” to leave the company after 18 years, adding further uncertainty to the company’s internal changes.
The impact of these departures on Tesla’s future direction and strategy worries investors, particularly concerning leadership succession.
Musk has led Tesla since 2008, but his attention has been divided between other projects like SpaceX and Neuralink.
The departure of CFO Zachary Kirkhorn in August, another potential successor, has also been interpreted as a sign of uncertainty.
The debate centers on two key points: the challenges Tesla faces in terms of growth strategy and leadership.
2. Declining Profits
This week, Tesla released its first-quarter results for this year.
If some investors were already concerned about the company, the data revealed only fueled uncertainty about its future plans.
The company posted a staggering 55% drop in profits compared to the first quarter of last year.
Tesla also reported a 9% decline in revenue in the first quarter, marking its largest year-on-year drop since 2012.
Another blow to the company came with the recall of thousands of units of its latest vehicle, the Cybertruck.
The vehicle had a faulty accelerator, which increased the risk of accidents.
3. Falling Sales
In its quarterly shareholder reports, Tesla refers to car deliveries upon receipt of orders.
Thus, car deliveries are the closest approximation to the concept of car sales, as sales are not precisely defined in the company’s official communications, CNBC explains.
As it stands, vehicle deliveries fell 8.5% year-on-year in the first quarter, their first drop since 2020.
This decline, according to experts, can be linked to some circumstantial factors such as global shipping disruptions or a fire in its European factory.
The scenario is complex, not only due to the drop in sales but also because of price cuts on its vehicles.
A few days ago, Tesla announced it would reduce the price of its Y, X, and S models by about $2,000 each.
Despite all these challenges, Elon Musk remained optimistic about the company’s prospects this week, telling investors he would move up the launch of new models starting in the second half of 2025.
In his dialogue with shareholders, Musk made it clear he also has bigger ambitions, such as his bets on autonomous vehicles and artificial intelligence development.
However, these ideas have been questioned by some analysts, with Deutsche Bank stating that driverless vehicles face “technological, regulatory, and operational challenges.”
4. Declining Market Value
Tesla’s shares had already fallen over the past year due to factors such as high-interest rates in many countries, which have made it harder to finance the purchase of its electric cars.
The company’s stock price has dropped 40% since the beginning of the year, with a market value of nearly $460 billion as of Wednesday’s close.
Since November 2021, when the stock was worth over $400, it has fallen to about $162.
This 40% drop in Tesla’s stock this year has caused it to fall several rungs in the rankings of America’s largest companies.
According to Dow Jones Market Data, the company ranked seventh in terms of market capitalization within the S&P 500 at the beginning of the year, while today, it is ranked 14th.
In what seems to be a bleak outlook, Tesla announced this week that it would introduce “new models” next year without giving further details. At the same time, it indicated it was abandoning plans to produce an entirely new low-cost model, which was supposed to cost $25,000.
Tesla “should consider itself an artificial intelligence robotics company,” not a car manufacturer, Musk said.
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