Investors are re-evaluating the premise that justified the astronomical price of Tesla shares and made its founder, Elon Musk, the richest person in the world.
Tesla’s $ 1 trillion valuation only made sense if investors believed the electric car company was on track to dominate the auto industry as Apple rules smartphones or Amazon orders retail on line.
But Tesla shares have fallen more than 40 percent since April 4, a much sharper drop than the broader market, which vaporized more than $ 400 billion in stock market value. And the fall has drawn attention to the risks the company faces. These include increased competition, lack of new products, lawsuits accusing the company of racial discrimination, and major production issues at Tesla’s Shanghai plant, which it uses to supply Asia and Europe.
Mr. Musk has not helped the stock price by turning his bid to buy Twitter into a financial soap opera. His journeys have reinforced the perception that Tesla does not have an independent board of directors that could prevent him from doing things that could damage the business and the company’s brand.
“From a corporate governance perspective, Tesla has a lot of red flags,” said Andrew Poreda, a senior socially responsible investment analyst at Sage Advisory Services, an investment firm in Austin, Texas. “There are almost no checks and balances.”
Even longtime Tesla optimists have doubts. Wedbush Securities analyst Daniel Ives has been one of Tesla’s strongest believers on Wall Street. But on Thursday, Wedbush lowered its target price for Tesla (the company’s estimate of fair market share value based on future earnings) to $ 1,000 from $ 1,400. Mr Ives cited Tesla’s problems in China, where blockades have limited the supply of crucial parts and materials and the demand for cars.
“There is a new reality for Tesla in China, and the market is re-evaluating the risks,” Ives said.
Production problems in China have undermined one of the reasons for making Tesla the most valuable car company in the world. Tesla vehicles have been a hit among Chinese buyers, fueling hopes of supercharged growth in the world’s largest car market. Tesla’s market share in China topped 2.5 percent in the first quarter of 2022, approaching luxury carmakers Mercedes-Benz, BMW and Audi.
But supply chain headaches in China are exacerbated by declining consumer demand, said Michael Dunne, chief executive of ZoZoGo, which advises companies in the electric car market.
Chinese consumers “are nervous, worried about the future,” Dunne said. “It’s a double whammy that Tesla faces China.”
Tesla’s actions are reacting in part to the same forces that are affecting stock markets around the world: the war in Ukraine, rising interest rates, the threat of recession, the chaos of the supply and rising inflation. But Tesla shares have fallen far shorter than other Silicon Valley giants such as Apple or Alphabet, the company that owns Google.
Tesla accounted for three-quarters of electric cars sold in the United States last year. The company is several years ahead of competitors in battery technology and software. But two models, the Model 3 sedan and the Model Y sports utility vehicle, accounted for 95 percent of Tesla’s sales. His next consumer vehicle, a pickup truck, has been delayed many times and is not expected until next year at the earliest.
It is an axiom in the automotive industry that new models fuel sales. And competition from Hyundai, Ford and Volkswagen is growing, offering drivers many more options.
Jesse Toprak, a veteran of the automotive industry who is chief analyst at Autonomy, a company that offers electric cars by subscription, said Tesla’s market share will fall below 40 percent by the end of 2023 , although its sales will continue to grow as the global market. expands.
“They’ll have a smaller portion of a larger pot,” Toprak said. “But its near-monopoly on electric vehicle sales in the United States will slowly decline.”
Tesla is already facing stiff competition in Europe, where electric vehicles account for 13 percent of new car sales. This portends what could happen in the United States, where battery-powered car sales are just beginning to take off. Volkswagen, which has invested heavily in electric vehicles, sold 56,000 battery-powered cars in Western Europe in the first three months of the year, just behind Tesla, which sold 58,000, according to figures compiled by Schmidt Automotive Research in Berlin.
Tesla’s ability to serve the European market will improve as a new factory near Berlin increases production. In the United States and elsewhere, the company has benefited from fanatically loyal buyers who consider Mr. Musk as a visionary and are willing to wait months or years for company cars.
But as electric cars gain popularity due to rising gasoline prices, the next wave of customers may not be as tolerant or as in love with Mr. Musk. “The next generation of buyers will be average people who buy electric vehicles because they make financial sense to them,” Toprak said. “Tesla’s brand image will be less useful.”
Cars leaving the Tesla factory in Shanghai. Production problems in China have undermined the value of the company. Credit … Aly Song / Reuters
Tesla’s image is under pressure in a way that could hurt the carmaker among politically liberal and environmentally conscious customers who have long been its largest customer base. The California Department of Fair Employment and Housing is suing Tesla, accusing it of allowing racial discrimination and harassment to thrive at its factory in Fremont, California, near San Francisco. Tesla is challenging the lawsuit.
Once again, the S&P 500 ESG, a list of companies that meet certain environmental, social, and government standards, drove Tesla out last month. S&P said it was concerned about allegations of racial discrimination and poor working conditions at the company’s Fremont factory.
Mr. Musk responded to S&P’s decision by writing on Twitter that the move to apply environmental, social and governance standards to corporations is a “scam” that “has been armed by fake social justice warriors.”
Mr. Musk followed this post on Twitter stating that he was changing his loyalty to the Democratic Party, which he said had “become the party of division and hatred,” and would now vote for Republicans. Statements with such political charges are sure to alienate some car buyers.
“The more a politician becomes, the more he could start influencing buyers,” said Carla Bailo, executive director of the Center for Automotive Research in Ann Arbor, Michigan.
Mr. Musk and Tesla did not respond to requests for comment.
Rotating the steering is another risk. Mr. Musk is a notoriously demanding boss who has warned Twitter employees that “work ethic expectations would be extreme” if he takes over the social media platform.
The agitation at Tesla is obvious. Many of his former senior executives are prominent in the San Francisco Bay Area start-up scene. Examples include Celina Mikolajczak, head of manufacturing for the new battery maker QuantumScape, which previously helped develop batteries at Tesla, and Gene Berdichevsky, another former Tesla battery developer who is CEO of Sila Nanotechnologies. Sila announced this week that it would supply advanced battery materials to Mercedes-Benz.
Lucid, the maker of the only electric model to beat Tesla in the Environmental Protection Agency’s tests on how far a fully charged electric car can go, was founded by Peter Rawlinson, a former Tesla engineer until he confronted Mr. Musk. Lucid’s headquarters are in Newark, California, a short drive from Tesla’s Fremont Factory.
Admirers of Mr. Musk is said to have helped promote emissions-free vehicles by sowing the talented industry. But critics see the risk that Tesla will never develop a stable level of experienced executives who can run the company if something ever happens to Mr. Musk.
“You can’t treat your workers badly in a job market as tight as ours,” he said. Poreda of Sage Advisory. “A brilliant man can’t make his vision come true without a lot of really smart people.”
In the midst of this litany of problems and risks, Mr. Musk has been devoting time to acquiring Twitter, though lately there seems to be some doubt about the deal. The raid on social media makes some investors wonder why the boss spends so much time writing letters on Twitter while the world burns.
“There’s just the feeling,” Mr. Ives of Wedbush, “that the pilot of the plane is watching some Netflix show while you’re going through a massive storm.”