Will Tesla’s profits continue to fall in 2024?

tesla (TSLA 0.15%) It was a big win last year, doubling its share price as part of a broader boom in artificial intelligence (AI) stocks. But in 2024, Tesla stock started off in the wrong direction.

The stock price fell 15% due to various negative news, including price cuts in Europe and China. decision by hertz Reversing its initial strategy to embrace EVs, it sells 20,000 electric vehicles, mainly Tesla. And recently, CEO Elon Musk joked about demanding 25% voting rights and threatening to build products outside of Tesla.

Despite Tesla’s surge last year, the company’s financial performance did not warrant much higher stock price growth. Sales growth slowed during the year, growing 9% in the third quarter and auto sales growth of just 5%.

Meanwhile, profits also plummeted due to price cuts and intensifying competition in the industry. Net income fell nearly 50% from $3.33 billion in the third quarter of 2022 to $1.88 billion in the third quarter of 2023.

Musk also spent much of his last earnings call bemoaning the impact of high interest rates and production issues related to the new Cybertruck and the slow ramp-up of production at the Mexican factory as it awaits clear signs of an economic rebound. Meanwhile, the company is also losing some EV tax credits in the United States.

Tesla has already cut prices twice this year, and with expectations of an imminent interest rate cut waning, a recovery in the company’s profit growth appears doubtful. The average Wall Street analyst expects earnings to rise by $3.74, or 19%, from the yet-to-be-reported $3.15. This is essentially in line with our sales growth forecast of 20%.

Image source: Tesla.

Can cost savings keep up with price cuts?

According to some Tesla bulls, like Ark Invest’s Cathie Wood, the company’s price cuts are a sign of strength because they help it gain market share and block competitors that can’t compete at lower price points. However, a price cut in the 10% range would have an immediate impact, weighing on Tesla’s automotive gross margins, which had already fallen to 18.7% in the third quarter.

The chart below shows the company’s production costs per vehicle by quarter over the past year.

Source: Tesla.

As you can see, Tesla was able to lower its cost of sales per vehicle by $2,000 over the past four quarters, and the company has been able to do so again. However, with the introduction of the Cybertruck, those costs are likely to increase further. In addition to the potential for lower production costs, Tesla is expected to increase production again next year, as evidenced by its 20% sales growth estimate.

Tesla has not yet provided a production outlook for 2024, but price cuts following last year’s cut suggest that the price per vehicle sold will almost certainly fall again.

Is Tesla a Buy?

If it can continue to cut costs, Tesla could achieve some profit growth this year, especially as its energy and services segments grow. But the business looks set to face another difficult year. same international rivals hyundai and BYD, competition is becoming more intense. Interest rates remain high. There are signs of weakening demand more broadly in the electric vehicle industry.

More details will be available next week when the company reports fourth-quarter earnings, but investors should brace for the stock to fall unless a new growth catalyst, such as fully autonomous driving, emerges. The stock is expensive and the financials alone don’t seem to justify the valuation.