It appears that after the recent rise in Tesla (NASDAQ:TSLA), share prices may be coming back to earth. At the start of July, Tesla reported deliveries above analyst estimates, which led to over a 40% increase in the Tesla stock price within a week. However, this week’s earnings release showed profits below projections, causing the TSLA stock to drop 12% the following day, dragging down the broader market. As it turned out, the company had increased sales numbers by cutting prices. The results raise questions around whether Tesla will provide further disappointing reports.
Many investors see Tesla as an artificial-intelligence (AI), robotics and technology firm that manufactures cars. This perspective helps justify its significantly higher price-to-earnings ratio (P/E) than other automotive manufacturers, which aligns more with tech companies. However, Tesla has acknowledged ongoing technical and regulatory challenges in marketing its self-driving products. Additional delays and slowing auto sales could mean Tesla stock may face further declines before a potential recovery.
Demand for Hope Remains
The volatility in Tesla stock over the last month indicates investors are eager to embrace any signs of good news to push Tesla’s share prices higher. In early July, Tesla reported that vehicle deliveries had fallen by 4.8% year-over-year (YoY). However, delivering 4,700 more cars than expected at 444,000 caused the stock to surge 10% in a single day. Typically, traditional industrial firms do not see such share price growth when sales decline.
This suggests Tesla operates more as a speculative investment, with the current price reflecting more of what investors hope the company will achieve rather than fundamentals. The 60.7x P/E single digits common for large automakers and even the 47x tech sector average. This contrasts with analyst consensus forecasting further TSLA stock price declines to an average target price of $187.56. Tesla’s stock price currently trades at ~$220 per share. Analysts have overestimated the company’s performance over several prior quarters.
Autonomy at The Core of Tesla
Cathie Wood’s ARK Investment Management is a major Tesla bull. As the share price declined in the first half, the fund purchased more Tesla stock only to sell after the delivery report boosted the price target. The fund resumed buying with lower prices, snapping up $7.2 million in shares following the “disastrous” Q2 earnings.
Slower car sales are not unique to Tesla; the entire industry faces squeezed profits as supply may outpace demand this year due to high inflation, slower growth and increasing interest rates. Tesla could escape this pressure through autonomous vehicle and AI developments, particularly the expected Robotaxi launch.
However, the major blow to shares came from postponing the self-driving update from August to October. Tesla’s CEO, Elon Musk, does not admit that timelines may be too optimistic. Tesla stock may remain under pressure until this uncertainty is resolved. As Musk himself said, “The value of Tesla overwhelmingly is autonomy”.
The Bottom Line: Tesla Relies on Automotive Sales
In the last quarter, Tesla’s automotive revenue dropped by 7%, while energy and services revenue increased by 100% and 21%, respectively. Despite strong growth in other revenues, it was not enough to significantly impact the company. Automotive still accounts for 78% of sales (down from 85% a year ago) and will likely determine the company’s short-term future. Also, the automotive market is expected to remain under pressure for the rest of the year.
Optimistic investors may be looking to capitalize on decreases in Tesla’s share price with the expectation that non-automotive revenue sources will provide strong future growth. However, that growth is still some time away, according to even the company’s most optimistic projections. Robotaxi launches are scheduled no earlier than the fourth quarter following third-quarter delivery number releases. So, the market may experience another period of fluctuating optimism and reality in October.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.