The past 12 months were a rocket ride for Tesla (NASDAQ:TSLA) stock. Shares doubled in value as the Magnificent 7 component helped set the pace for the gains realized by the entire S&P 500 index.
Unfortunately, next year isn’t shaping up to be quite as magnificent. Instead, it’s going to be more like 2022 for investors when TSLA stock lost 65% of its value. While it’s likely not to be a good year overall for electric vehicles, as the industry leader Tesla will bear the brunt of the EV market’s decline.
Flagging Demand and TSLA Stock
It’s a well-publicized fact EV demand is spiraling lower. Inflation-sapped consumers are leery of spending big bucks on pricey EVs. The average cost of a new EV is $63,725 while fossil-fuel-powered new cars cost $48,247 on average.
Dealer inventories are growing too. Bloomberg reports EVs are sitting on dealer lots for 114 days, a new all-time high and more than double the year-ago 53-day figure. It also far exceeds the auto industry average of 71 days.
General Motors (NYSE: GM) gave up hopes for building 100,000 EVs in the second half of 2023 and 400,000 vehicles by the first half of 2024.
“As we get further into the transformation to EV, it’s a bit bumpy,” CEO Mary Barra told analysts during the automaker’s earnings conference call.
Next year’s production for Ford‘s (NYSE:F) F-150 Lightning EV pickup was also just cut in half.
And the situation isn’t about to improve. Prices for used EVs are falling. While that might spur purchases in the used car market, it could hinder new car sales. Buyers will be leery of paying up for a vehicle that will dramatically lose value once it’s driven off the lot.
Declining Incentives
Tesla faces its own special set of circumstances that will turn buyers against it. On Jan. 1 the Tesla Model 3 RWD and Long-Range models will completely lose the entire $7,500 federal tax credit for EVs.
Previously it said it would lose just half. Industry site Electrek says Tesla is also warning buyers the Model Y will likely lose it too. The 3 and Y are, of course, Tesla’s biggest sellers. Tesla delivered over 419,000 3s and Ys in the third quarter, or 96% of total deliveries.
The changes are because of new trade restrictions with China that limit the number of parts manufacturers can use from the country.
It means price cuts are looming for Tesla EVs to spur demand. It already cut them aggressively in 2023 as demand sputtered. Losing the tax credits will have it cutting them further next year to remain competitive. That will further eat away profit margins. Gross margins crumbled 719 basis points (bp) to 17.9% in the third quarter while operating margins cratered 964 bp to just 7.9%.
However, Tesla plans to build cheaper cars in the future. CEO Elon Musk revealed the Model 2 will cost $25,000 and be built at its Berlin, Germany Gigafactory. Yet he’s also hinted at one being built in the Austin, Texas Gigafactory where the Cybertruck is made. That’s not likely to hit the market anytime soon because it would undercut Model 3 and Y sales.
What It All Means
EV demand, though slowing, still commands a growing percentage of cars sold. They’re not about to replace gas-powered vehicles anytime soon but Tesla still owns about 50% of the EV market. It will be a leader for years to come.
That suggests Tesla stock will be worth owning a decade or two down the road. It also means you might not want to buy today. Don’t sell shares you own, but wait utill later in 2024 when they’ve retraced the gains they made this year. That’s when you should swoop in.
On the date of publication, Rich Duprey did not hold (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.
