Can Tesla Overcome Slowing EV Growth in 2024?

In 2017, Tesla (TSLA) was about a month away from bankruptcy.

Today, it dominates the electric vehicle market.

But 2024 brings new challenges.

During Tesla’s latest earnings call, management said they expect lower growth in 2024 as EV demand wanes.

That’s caused shares to pull back from the highs in 2023 by nearly 38%.

However, financial pros believe there is an opportunity here.

As search volume increased before and after the earnings call, many money managers focused on the long-term production and sales forecasts for the company, according to our TrackStar data.

This implies they’re willing to look beyond the upcoming quarters, giving Musk a chance to hit his 50% average annual growth targets.

After digging into the company’s financials, we agree with the pros.

And here’s how we expect things to play out.

Tesla’s Business

Tesla created world-class manufacturing, delivering margins other automotive players couldn’t match.

Elon Musk built a rabidly loyal fanbase with battery-powered cars that combine luxury and technology.

Source: Tesla Website

Consumer appetite for electric vehicles has plunged, prompting General Motors and Ford to scale back on EV production in favor of gas engines.

In 2017, Tesla produced just over 100k vehicles. Last year, it produced 1.845 million.

Source: Tesla Q4 2023 Investor Report

Tesla is more than just vehicles. It also owns almost 6,000 charging stations with nearly 55,000 connectors.

Plus, it designs, manufactures, and installs solar power systems, though this makes up less than 6.5% of total revenues.

Tesla currently offers the lower-end Model 3 and Model Y cars, the Model X luxury SUV, and the luxury Model S sports car.

Recently, the company announced the launch of its Cybertruck, which began sales in late 2023.

Unfortunately, the timing wasn’t great.

Consumer demand for EVs has fallen dramatically, forcing General Motors (GM) to cut production in favor of gas engine models and Tesla to reduce pricing to keep inventory moving.

However, Tesla has the margins to play with. It can cut prices to keep volume up, maintaining efficiencies and capturing a higher market share.

Financials

Source: Stock Analysis

Tesla has done a good job meeting Musk’s 50% annual growth target.

However, margins have compressed recently as the company faced inflationary pressures and price drops.

Unfortunately, everything relies on the cost of production and sales prices.

You can see above how gross margins largely dictate everything from profit margins to free cash flow.

Amazingly, Tesla has funded its growth almost entirely through its operations as total debt sits at just $9.6 billion. Of the almost $14 billion in operating cash flow, the company expects Capex to increase from $8 billion in 2023 to $10 billion in 2024.

Valuation

Source: Seeking Alpha

Compared to its peers, Tesla looks expensive.

However, it keeps getting cheaper as its volume expands and costs come down. Its 46x cash is relatively cheap compared to its historical valuation.

And with sales expected to keep climbing, that multiple will continue to shrink.

Growth

Source: Seeking Alpha

Tesla is in its own growth category.Only Nio (NIO) comes anywhere close.

The legacy automakers typically average growth in the single digits.

Tesla’s worst years are still close to 20%.

And as it improves operational efficiencies, we expect free cash flow to keep expanding.

Profitability

Source: Seeking Alpha

The profitability metrics say it all.

Toyota Motors (TM) is the only one in the ballpark in terms of gross and EBIT margin. But it’s still behind on net income margin.

Plus, Tesla is more consistent in its margins and results.

Our Opinion: 10/10

Tesla may be volatile and facing a challenging 2024.

However, we believe it’s more likely to hurt other automakers more.

Tesla is the best at what they do, with unmatched manufacturing.

All of this says nothing about its AI and autopilot capabilities.

We’d buy Tesla on pullbacks, using volatility to get better entry prices.

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