Investors are overestimating the premise that justified the astronomical price of Tesla’s shares and made its founder Elon Musk the richest man in the world.
Tesla’s $ 1 trillion estimate only made sense if investors believed the electric car company was about to dominate the automotive industry the way Apple manages smartphones or Amazon manages online retail.
But Tesla’s shares fell more than 40 percent since April 4 – a much sharper decline than the broader market, evaporating the value of the stock market by more than $ 400 billion. And the collapse drew attention to the risks the company faces. These include increasing competition, shortages of new products, lawsuits accusing the company of racial discrimination and significant production problems at Tesla’s Shanghai plant, which it uses to supply Asia and Europe.
Mr Musk did not help the stock price by turning his offer to buy Twitter into a financial soap opera. His antics reinforced the notion that Tesla did not have an independent board of directors that could stop it from doing things that could harm the company’s business and brand.
“From a corporate governance perspective, Tesla has a lot of red flags,” said Andrew Poreda, a senior analyst who specializes in socially responsible investing at Sage Advisory Services, an investment firm in Austin, Texas. “There are almost no checks and balances.”
Even Tesla’s longtime optimists have doubts. Daniel Ives, an analyst at Wedbush Securities, is one of Tesla’s most loyal believers on Wall Street. But on Thursday, Wedbush lowered its target price for Tesla – the company’s estimate of the fair market value of shares based on future profits – to $ 1,000 from $ 1,400. Mr Ives cited Tesla’s problems in China, where the blockade has reduced supplies of important parts and materials and demand for cars.
“In China, there is a new reality for Tesla and the market is reassessing the risks,” Mr Ives said.
Production problems in China have undermined one of the reasons Tesla has become the world’s most valuable car company. Tesla cars were a hit among Chinese buyers, fueling hopes for rapid growth in the world’s largest car market. Tesla’s market share in China exceeded 2.5% in the first quarter of 2022, approaching luxury car manufacturers Mercedes-Benz, BMW and Audi.
But supply chain headaches in China are compounded by declining consumer demand, said Michael Dunn, CEO of ZoZoGo, which advises companies in the electric car market.
Chinese consumers are “nervous, they are worried about the future,” Mr Deng said. “This is a double blow that Tesla is facing in China.”
Tesla shares are responding in part to the same forces that are driving stock markets around the world: the war in Ukraine, rising interest rates, the threat of a recession, chaos in the supply chain and rising inflation. But Tesla’s shares fell far more 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 batteries and software. But two models – the Model 3 sedan and the Model Y sports car – account for 95 percent of Tesla’s sales. His next vehicle, a pickup truck, has been delayed many times and is not expected until next year at the earliest.
An axiom in the automotive industry is that new models fuel sales. And competition from Hyundai, Ford and Volkswagen is growing, offering drivers much more choice.
Jesse Toprak, a veteran of the automotive industry who is a senior 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 common market expands.
“They will have a smaller share of a larger pot,” Mr Toprak said. “But their near-monopoly on U.S. electric car sales 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 sales of battery-powered cars are just beginning to grow. Volkswagen, which invests heavily in electric vehicles, sold 56,000 battery-powered cars in Western Europe in the first three months of the year, just after Tesla sold 58,000, according to data collected by Schmidt Automotive Research in Berlin.
Tesla’s ability to serve the European market will improve as a new plant near Berlin increases production. In the United States and elsewhere, the company has taken advantage of fanatically loyal buyers who consider Mr. Musk a visionary and are willing to wait months or years for the company’s cars.
But as electric cars are gaining popularity due to soaring gasoline prices, the next wave of customers may not be so tolerant or so in love with Mr. Musk. “The next generation of buyers will be ordinary Joe who buys electric cars because it makes financial sense for them,” Mr Toprak said. “The Tesla brand image will be less useful.”
When they leave the Tesla plant in Shanghai. Production problems in China have undermined the company’s value. Credit … Ali Song / Reuters
Tesla’s image is under pressure in ways that could harm the carmaker among environmentally conscious, politically liberal 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 disputing the case.
In another blow, the S&P 500 ESG, a list of companies that meet certain environmental, social and management standards, was dropped by Tesla 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 movement to apply environmental, social and governance standards to corporations was a “fraud” armed with fake social justice fighters.
Mr Musk followed on Twitter, announcing his change of allegiance to the Democratic Party, which he said had “become a party of division and hatred” and would now vote for Republicans. Politically charged statements like these will surely repel some car buyers.
“The more political it gets, the more it can start to affect buyers,” said Carla Bailo, chief executive of the Center for Automotive Research in Ann Arbor, Michigan.
Mr Musk and Tesla did not respond to requests for comment.
Leadership is another risk. Mr Musk is a notoriously demanding boss who warned Twitter officials that “expectations of work ethic would be extreme” if he took over the social media platform.
The outflow of Tesla is obvious. Many of his former senior executives are highlighted in the launch scene in the San Francisco Bay Area. Examples include Selina Mikolajczak, production manager at the young battery maker QuantumScape, which previously helped develop Tesla batteries, and Jean Berdichevski, another former Tesla battery developer who is CEO of Sila Nanotechnologies. Sila announced this week that it will supply materials for Mercedes-Benz’s advanced batteries.
Lucid, the maker of the only electric model to beat Tesla in the Environmental Protection Agency’s tests of how far an electric car can go when fully charged, was founded by Peter Rawlinson, a former Tesla top engineer, until he got into a fight. with Mr. Musk. Lucid is headquartered in Newark, California, a short drive from Tesla’s Fremont factory.
Fans of Mr Musk say he has helped promote zero-emission vehicles, giving rise to a talented industry. But critics see the risk that Tesla will never create a stable echelon of experienced managers to run the company if something happens to Mr. Musk.
“You can’t treat your workers badly in the narrow labor market we have,” said Mr. Poryada of Sage Advisory. “A bright person can’t make his vision a reality without a lot of really smart people.”
Against this backdrop of this set of problems and risks, Mr Musk is spending time acquiring Twitter, although he seems to be considering a deal lately. The onslaught on social media has led some investors to wonder why the boss spends so much time writing Twitter messages while the world burns.
“It just feels like,” Mr. Ives of Wedbush said, “that the pilot on the plane is watching a Netflix show as you go through a huge thunderstorm.”
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