Tesla Inc. (TSLA, Financial) has long been one of the stock market’s most polarizing names, yet even its most vocal critics will not deny it helped jumpstart the electric vehicle boom that has gripped the global automotive industry.
As one of the earliest movers in the EV space, Tesla was virtually alone in the market during its meteoric rise. It faced little, if any, serious competition from other automakers for many years, a fact that allowed it to become virtually synonymous with EVs in the eyes of consumers and investors alike.
Those days are long gone. Today, Tesla faces a very different market, one marked by intensifying competitive pressures.
The threat of competition, once laughed off by Tesla’s cheerleaders, is now an undeniable reality. The raft of new EV offerings that have come to market over the course of 2022 is proof enough of that fact.
Rising competition in the global market
The EV space is getting more crowded by the day. Nowhere is this more apparent than in Tesla’s two most important international markets, China and Europe, both of which are now home to Tesla Gigafactories.
The European market has become something of a “canary in the coalmine” for EV demand and competition. Consumers have enjoyed a wide variety of offerings from a host of automakers for far longer than other international markets, becoming the closest thing the world has to a fully established EV market. Tesla was expected to claim a larger share of the European market thanks to its newly minted factory in Brandenburg, Germany. However, operating issues at the plant, as well as sustained competition from other automakers, have prevented Tesla from taking a bigger bite out of the market thus far. Within the 14 national markets tracked by data provider EU-EVs, Tesla managed to claim just 16.4% market share in the third quarter, well short of the 25% boasted by market leader Volkswagen AG (XTER:VOW3, Financial).
Things are hardly better for Tesla in China. Tesla started the year as China’s top EV maker, but has struggled to keep pace with its domestic competitors. Indeed, despite ramping up the production capacity of its Shanghai plant significantly, the company has been supplanted as the leader of the Chinese EV market by homegrown BYD Co. Ltd. (BYDDY, Financial).
Like any other market, intensifying competition in the EV market has made selling cars more challenging for the individual automakers fighting over consumers. Tesla is not immune to these pressures, as evidenced by its recent efforts to respond to rising competition in various markets. In China, for example, Tesla has offered a raft of price cuts and other incentives in an effort to juice up demand. It has also turned repeatedly to the export market to move metal.
Downgrades on demand weakness
Thus far, Tesla’s efforts to drive demand through price cuts have had only limited success, a fact that has led some investors to question the long-term demand for its still-limited lineup of EVs. Fears of demand weakness intensified in the wake of Tesla’s lackluster third-quarter earnings presentation in October, leading a number of analysts to slash their price targets.
On Dec. 7, Bernstein joined the chorus of Wall Street shops sounding the alarm about Tesla’s incipient demand issues:
“Tesla increasingly appears to have a demand issue. The company has responded by cutting prices in China and the US (for December deliveries), and purportedly reducing production in China. We estimate that price cuts In China and the US this quarter (Q4) will negatively Impact ASPs globally by roughly 2.6% or $1,400 per car. All else equal, this points to a 200 bps decrease In automotive gross margins. We suspect the net impact will be lower, but believe that consensus estimates to automotive gross margins improving 110 bps sequentially in 04 may be at risk…Given TSLA's pullback YTD, we see current risk/reward on the stock as more balanced, though still somewhat negative, due to Tesla's absolute valuation, and the increasing risk of downward revisions amid potential demand challenges.”
Cutting prices may help move metal, but it comes at the price of compressed margins. Tesla has long boasted industry-beating margins, which may help cushion the blow from price cuts somewhat. However, Tesla’s margin advantage has also been core to its valuation. Ongoing demand challenges may also threaten to alter the market’s perception of Tesla as a “different kind of automaker” that is worthy of a valuation multiple far in excess of its industry peers.
My take
Tesla originally made its name as an industry disruptor, leading the charge toward the EV revolution. As CleanTechnica’s Steve Hanley pointed out on Dec. 5, it takes more than disruption to succeed in the long run:
"Tesla is no longer the quirky upstart it once was. It is now a mainstream automaker and facing increasing competition from its peers. The big question now is whether Tesla can make the transition from a typical ‘run around and break things’ Silicon Valley startup to a mature company that has to rely on more than disruption of the status quo to survive."
Intensifying competition across its major markets has already forced Tesla to cut prices. Should the company also feel compelled to decrease production output, the market may be forced to reassess the many years of rapid and sustained growth already priced into its $526 billion market capitalization.
Trade carefully.
