Tesla shares drop after sales growth warning

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The value of Tesla stock dropped by 10% when the markets opened on Thursday in New York. This was after the company had given a warning that it expected sales growth to decrease significantly this year, due to a decrease in demand, increased competition, and high interest rates which were hindering the effect of several price cuts.

In a report shared with investors after the close of the stock market on Wednesday, the American electric vehicle manufacturer announced that it was currently in a transitional period in which it was moving from one period of significant expansion to another.

Elon Musk, the CEO of the company, announced that they are getting ready to commence the production of a more affordable car by the latter half of 2025. This plan was initially proposed five years ago. The forthcoming model would incorporate an innovative manufacturing process, thereby reducing its overall costs.

According to Tesla's shareholder letter, the rate at which they are producing vehicles might slow down in the year 2024. They explained this could be due to their focus on creating a new generation of vehicles at their Texas factory. The growth rate in 2023 is likely to be higher because they will not be preoccupied with the launch of a new product.

Tesla's recent financial report indicates that the company's growth has slowed down due to decreasing global demand for electric vehicles. This also suggests that the leading automaker has now entered a phase of reduced sales growth and profitability.

During a discussion with investors and analysts, Musk explained that it is challenging to make precise predictions due to the lack of a crystal ball. He stated that the outcome of margins will depend on the speed at which interest rates decrease. If interest rates decrease rapidly, margins will be favorable. If the decline is slow, margins may not be as good.

The shares of Tesla went down by 9% during trade at an early time, marking a decrease of almost 25% this year. In the year 2023, the stock had increased to double its initial value.

In the last quarter of December, Tesla experienced a decrease in revenue growth and a reduction in its gross margin. The company's revenue increased by only 3% to $25.2 billion, which is the slowest rate of growth in over three years. This figure fell short of what experts had predicted, as they were expecting revenue of $25.6 billion. These details were revealed in Tesla's latest earnings report, which was released on Wednesday.

Tesla announced that it successfully met its goal of delivering 1.8 million cars in 2023. However, unlike previous years, the company did not provide a specific target for deliveries in 2024. Analysts predict that Tesla will sell approximately 2.2 million vehicles next year, resulting in a growth rate of around 20%, which is significantly less than the 50% annual increase promised by the company three years ago.

The sales of electric vehicles have been increasing worldwide, reaching new highs. However, the growth has been slower than anticipated, mainly due to mass-market consumers who find electric vehicles more expensive than gasoline alternatives. This situation has caused some electric vehicle companies such as Ford and General Motors to reduce their expansion plans. Additionally, Hertz, a rental company, has decided to sell off one-third of its electric vehicle fleet to purchase more gasoline vehicles.

The competition is getting intense, and China's BYD has surpassed Tesla as the leading electric vehicle maker worldwide in the last quarter of 2023 by selling 1.58 million all-electric cars. Tesla had to lower the prices of their priciest models last year after previously increasing them in 2022.

Kelley Blue Book, a research firm, reports that a remarkable 1.2 million electric vehicles were sold in the US in 2023. This equals a 7.6 percent share of the domestic automobile market, a boost from 5.9 percent in 2022.

In the quarter, Tesla's gross margin was 17.6 percent, which fell short of what experts on Wall Street predicted - they anticipated the margin would be 18.3 percent. This figure was also lower than 23.8 percent from the previous year. When excluding regulatory credits, the gross margin from Tesla's automotive unit - deemed a vital metric for the company's fundamental operations - climbed to 17.2 percent, which was just a little higher than consensus estimates. Compared to the previous quarter, where the margin was at its lowest level in over four years, at 16.3 percent, this quarter's gross margin showcased an advancement.

Tesla reduced its margins because they lowered prices, invested more money in research and development, and incurred costs while ramping up production of its latest pickup truck, the Cybertruck. The company revealed that it's spending more money on capital expenses than ever before, including upcoming projects, and expects to surpass $10 billion in 2024.

Out of the seven top tech companies, also known as the “Magnificent Seven”, Tesla has had the poorest performance. Apple, Microsoft, Alphabet, Amazon, Nvidia and Meta have all reached new heights in recent months while Tesla has been struggling. In fact, Tesla's stocks have fallen by 16.3 per cent this year.

Reduced prices and increased expenses, along with factors like excessive stock and declining appeal, have contributed to the negative attitude. Despite being recognized as the “sole company facilitating AI” by Morgan Stanley experts, the automaker has not experienced a share price boost from AI technology like its competitors.

During the earnings call, Musk mentioned his plans to create a highly advanced AI and robotics company, which he believes has the potential to dominate the industry. He also speculated that Tesla might someday become the world's most valuable enterprise.

Earlier this month, Musk made a request on social media platform X for a larger ownership share in Tesla, with the aim of creating AI products at the electric car company. He stated that he wanted to possess 25% of the company, and if his conditions were not met, he would pursue other business ventures outside of Tesla. Alongside the production of self-driving technology, Tesla has also been working on a humanoid robot known as Optimus.

When asked about the message by investors, Musk expressed worry that he may be "ousted by a shareholder advisory company without rhyme or reason."

He expressed his desire to become a responsible caretaker of highly potent technology and emphasized that having 25% control of the company may not be sufficient for him to have complete control but it gives him significant sway over decision-making.

Musk now holds approximately 13% of shares in Tesla, as he recently sold a substantial amount to fund his $44 billion purchase of Twitter, which he rebranded as X.