Head of Equity Strategy
Summary: Just three months ago Tesla sounded confident in their growth outlook but since then the share price is down 48% reflecting a growing nervousness over the demand picture which looks to be deteriorating in China and Europe, the two largest EV markets in the world. In addition, higher interest rates will continue to impact the equity valuation and financing costs over time as the car industry remains one of the most capital intensive industries in the world.
Elon Musk is known for overpromising and so far it has cost him little, with his most optimistic estimate being 50% growth in deliveries over a multi-year horizon. However, Tesla shares are increasingly facing stiff headwinds with the share price down 61% from the peak in early November 2021. The initial repricing of Tesla was due to higher interest rates impacting capital intensive industries but also companies with excessive equity valuation a category Tesla has been part of for years. The past three months have seen Tesla shares down 48% and with interest rates more or less flat over those three months, Tesla shares have not reacted to the cost of capital. Instead, the market is now beginning to price in a deteriorating demand picture for EVs.
That demand for EVs has come down in China is not new and has been an ongoing theme the entire year which has also been reflected in Chinese EV stocks. Adding to the negative demand story, Thomas Schmall the CEO of VW’s components division said yesterday that surging European electricity prices are hurting demand in Europe and elevated battery materials prices are also keeping prices elevated on EVs. According to Schmall it is only the US market that is still looking good because of the US Inflation Reduction Act relative to expectations a couple of months ago, but the US is also the smallest EV market of the three major markets. Tesla’s high expected growth rate is assuming that electricity production can expand rapidly and prices will remain low and this key assumption is now looking doubtful.
Longer term the slowdown in EV adoption due to elevated electricity prices will mean that competitors can catch up on their designs and production processes for EV manufacturing eroding some of the first-mover advantage that Tesla has enjoyed. Given the slowdown that is arguably taking place in the world and now also in EV adoption it is difficult to comprehend the consensus estimate for 2023 revenue at $116bn up 39%. This expectation seems out of touch with the incoming information and also the falling share price.
Yesterday’s move lower in Tesla shares was interesting given the positive equity market and among Saxo clients we observed that retail investors were net buyers of shares. Under the assumption that Saxo’s client base is a good proxy for general retail investor behaviour we have a situation where institutional investors are becoming realistic about EV makers such as Tesla and then retail investors still buying the hope and dreams of Elon Musk.
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