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The EV industry’s golden child keeps hitting speed bumps

The electric vehicle (EV) industry is facing turbulence in 2024 as disappointing sales and valuation adjustments reveal scaling challenges. Tesla (TSLA), once a hyper-growth leader, has struggled with rising competition and supply chain constraints, leading to a decline in automotive revenues. In today’s FA Alpha Daily, we delve into Tesla’s ongoing challenges and investor concerns about its ambitious plans beyond the automotive industry. 

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The once high-flying electric vehicle industry has hit turbulence in 2024 as disappointing sales reports and valuation adjustments have exposed the challenges of scaling a new technology.

After years of hypergrowth fueled by optimism around EVs, the reality of mainstream adoption has set in with demand failing to meet inflated expectations.

EV sales year-over-year growth slowed to 50% in 2023—a stark contrast from the triple-digit increases investors had grown used to.

This signaled that mainstream adoption may not follow the exponentially rising curve that bullish forecasts had predicted.

The flurry of disappointing news shook confidence in an industry that had been priced for relentless gains.

Tesla (TSLA) has kept hitting speed bumps in its hyper-growth trajectory caused by rising competition and the difficult task of transforming beyond the auto industry.

In its latest earnings call, the company reported lackluster numbers that fell short of Wall Street forecasts. Automotive revenues declined (7)% year-over-year, and the operating margin declined 333 basis points to just 6.3%.

Elon Musk cited increasing price pressure from rivals offering cheaper EVs as the main culprit.

With legacy automakers like Ford (F) and GM (GM) as well as startups like Rivian (RIVN) ramping up production, Tesla can no longer rely on being the only game in town. Discounts are eating into margins.

The global semiconductor shortage also remains a lingering problem. While Tesla fared better than most, supply chain constraints still limited its ability to scale even faster. This comes at a time when consumer demand for EVs shows no signs of slowing down.

Looking beyond cars, Tesla’s vision of transforming into an AI powerhouse powered by technologies like robotaxis and Optimus robots looks increasingly distant.

The highly anticipated “Robotaxi Day” demo was pushed back, raising doubts about an imminent rollout of fully autonomous vehicles.

Meanwhile, Tesla faces scrutiny over Elon Musk’s proposal to invest $5 billion of the company’s cash into his newly founded artificial intelligence startup, xAI.

The proposed $5 billion investment also dwarfs Tesla’s entire R&D budget, diverting massive capital away from improving its core automotive operations which still generate the bulk of profits.

After the new round, xAI will most likely become even pricier, while it effectively brings in $0 in revenue. Tesla investors may overpay for it.

As realities start to diverge from Musk’s ambitious timelines, investors are demanding the company execute tangible goals in the near term.

However, sustaining hypergrowth solely through car sales will be an uphill task in a commoditizing market. Unless Tesla can accelerate other revenue streams, it may lose its premium valuation.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

This portfolio analysis highlights the same insights we share with our FA Alpha Members. To find out more, visit our website.

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