Undeniably, EV manufacturer Tesla (NASDAQ:TSLA) deserves tremendous praise for redefining what’s possible in the broader mobility field. As such, the company sparked a massive paradigm shift that legacy automakers are only just now responding to. However, as the industry shifts into higher gear, rising standards and competition won’t make things easy for the pioneering enterprise. Therefore, I am neutral on TSLA stock because of lingering uncertainties.
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Market Share Data Crimps Enthusiasm for TSLA Stock
Despite the trials and tribulations that the EV sector faced last year, TSLA stock performed swimmingly well on paper. In the past 52 weeks, shares gained over 66%. However, the framework is also a tale of two cities. In the past six months, TSLA lost around 22% of its equity value. Likely, much of the consternation on Wall Street centers on Tesla’s loss of market share.
According to TipRanks reporter Sirisha Bhogaraju, EV sales in the U.S. market reached record levels in the third quarter of 2023, landing at 313,806 units. That comes out to a year-over-year growth rate of approximately 50%. Notably, this was the first time that domestic EV sales surpassed the 300,000 mark in Q3. However, what stood out – for the wrong reasons – was TSLA stock.
Sure, Tesla’s sales increased by 19.5% against the year-ago quarter to 156,621 vehicles. Unfortunately, the company’s market share dipped to 50% in Q3 2023. That compared unfavorably to the 59.3% share posted in Q2 and 62.4% posted in Q1.
Bhogaraju summed it up perfectly. “While Tesla remains the undisputed market leader in the U.S., other players are gradually expanding their EV presence and gaining traction.” Although it’s probably not fair to say that TSLA stock is a decisive Sell, it certainly strikes a cautionary tone.
As stated earlier, the issue comes down to rising standards and competition. As Bhogaraju stated, other EV players – particularly legacy automakers – are pushing aggressively into the market. And as the competition makes more products available, consumers will have more choices.
So, Tesla’s rather notorious quality control issues – including some serious ones – may no longer be tolerated. Why would they be when consumers have more options, including from trusted legacy automakers?
Tesla Addressing the Matter Makes It Less Enticing
To be sure, Tesla leverages the ability to address the quality control matter and other issues clouding TSLA stock. In most respects, it’s an ingenious brand, so rolling up its sleeves should be no problem. However, it will likely cost money to respond to certain ongoing concerns. Therefore, the investment thesis may come under significant challenges.
In fact, investors have already gotten a taste of this dynamic. A few days ago, TipRanks contributor Steve Anderson reported that Tesla production workers would be receiving a planned pay raise. Naturally, that’s wonderful news for the beneficiaries. However, Wall Street was far less excited, sending TSLA stock down over 3% following the news.
Let’s think about that for a second. As EV industry standards rise, so too will competition for the best workers. Therefore, Tesla must pay up to maintain its talent base. And it’s probably going to have to pay up to correct lingering issues such as relatively lax quality control. Again, it’s very possible that consumers will be more discriminating in their decision-making processes.
Ironically, Tesla’s price war may stymie efforts to provide such correction. While the lesser-capitalized EV startups may fail, it’s unlikely to bother the legacy giants. Further, slashing prices doesn’t directly address the quality control matter. If other companies respond with their own price cuts and provide a higher level of consistency and quality, Tesla could be shooting itself in the foot.
Compounding the narrative is that the low-hanging fruit will likely soon be picked. In 2021, global EV sales saw a year-over-year rise of 107.8%. In 2022, the growth rate clocked in at 55%. However, if growth slows from here, the heightened competition will make it more difficult for TSLA stock to advance should Tesla stay static regarding its problem areas.
Tesla’s Valuation is a Rising Concern
Not surprisingly, given the tremendous popularity of TSLA stock, it prints a hot valuation. At the moment, shares trade at 70.6x trailing-year earnings and 62.5x forward earnings. However, one of the company’s saving graces was its return on invested capital of 23.6%. Basically, this metric tells investors how effective the target company is at converting capital to profitable investments.
Nevertheless, as consumers begin to expect more, they’re less likely to tolerate issues such as panel gaps, let alone serious issues such as equipment defects and malfunctions. Plus, as the EV market evolves and matures, Tesla has to invest more of its funds to keep customers (and workers) happy. That means the valuation – which is already high – could be even worse under a broader context.
Is TSLA Stock a Buy, According to Analysts?
Turning to Wall Street, TSLA stock has a Hold consensus rating based on 12 Buys, 13 Holds, and five Sell ratings. The average TSLA stock price target is $249.92, implying 14.18% upside potential.
The Takeaway: TSLA Stock is Facing an Uphill Battle
While it may not be time to sell (let alone short) EV sector king Tesla, it’s fair to be skeptical. With the sector’s low-hanging fruit likely to be picked soon, the company faces an uphill battle, given rising competition and consumer standards. To meet these elevated standards, Tesla must allocate funds to help address lingering problems. However, that makes its high valuation even more unpalatable.
