Tesla (NASDAQ: TSLA) operates in the realm of electric vehicles (EVs) on a grand scale. Nevertheless, its stock has taken a beating, descending 39% from its zenith in 2021, shying away from outdoing the S&P 500 index this year.

A host of predicaments envelop Tesla, ranging from dwindling EV demand and heightened competition to a notable deceleration in sales growth. Alarming speculations loom large, hinting at a potential contraction in the number of EVs delivered by the company in 2024, a feat not witnessed since the inception of its iconic Model S back in 2011.

Tesla’s valuation, despite its descent post-2021, remains staggeringly high. The apprehension mounts as the prospect of a dip in annual EV sales lurks on the horizon, posing a grave risk to the downward spiral.

The Bumpy Road for Tesla

Continuing its tumultuous journey, Tesla witnessed a 6.5% plummet in total EV deliveries during the first half of 2024 compared to the corresponding period in the previous year. Adding to the gloom, the recently unveiled third-quarter delivery figures failed to meet the projections set by Wall Street. These results amplify in gravity considering Tesla’s strategic price slashes in the past year to stir up demand.

The downward trajectory of prices has triggered a persistent dip in Tesla’s gross profit margin, currently halved from its zenith three years back. Evidently, the slashed prices not only failed to stimulate sales growth but also inflicted substantial damage on the company’s profitability.

Yet, Tesla’s woes do not stand in isolation. The EV sector at large witnessed a staggering 44% plunge in sales across Europe in August, with its market share dwindling from 21% to a mere 14% within a year. Major players like General Motors and Ford Motor Company have opted to slash billions from envisioned investments in their EV divisions, attributing the move to weak demand.

The harsh economic backdrop compounded by soaring interest rates is nudging consumers toward more economically feasible gasoline-powered vehicles.

Fierce competition compounds Tesla’s tribulations. In countries boasting low production expenses like China, companies such as BYD are churning out EVs at price points Tesla struggles to match. Notably, the BYD Seagull retails for under $10,000 in China, with plans underway to conquer the European market by 2025.

With a substantial presence in China and Europe, Tesla is feeling the heat. Consequently, the company has slated the release of a budget-friendly EV next year, potentially priced at a modest $25,000. While unlikely to oust the Seagull, it may appeal to budget-conscious consumers seeking a more upscale alternative.

Peril Looming: Tesla’s Delicate Delivery Equation

Forging ahead since the inception of its flagship Model S in 2011 with an initial delivery of 2,600 units, Tesla’s delivery numbers have steadily ascended with the introduction of the Model 3, Model Y, Model X, and Cybertruck. In 2023, a monumental 1,808,581 cars were delivered, marking a 38% upsurge from the previous year. However, the growth rate, commendable as it was, notably lagged the 50% annual growth ardently pursued by CEO Elon Musk.

Recent challenges have fogged the crystal ball, rendering Musk reticent about prognosticating for 2024. Analysts, left to conjecture, approximate deliveries around 2.2 million for the year, signaling a mere 22% growth from 2023. This not only falls short of Musk’s lofty 50% target but also hints at a looming predicament.

Having dispatched 1,293,656 cars in the initial three quarters of the current year, Tesla must muster a record-breaking 514,925 units in the final quarter to surpass the previous year’s tally. Failure to achieve this feat would see deliveries shrink on an annual basis for the first time since the launch of the Model S.

Image source: Tesla.

Valuation Conundrum: The Exorbitant Price Tag on Tesla Stock

With Tesla’s trailing twelve-month earnings per share clocking in at $3.56 and the current stock price hovering at $249.27, the price-to-earnings (P/E) ratio stands at a staggering 70. This marks a stark contrast to the Nasdaq-100 technology index’s P/E ratio of 32.1, underscoring Tesla’s exorbitance. Surpassing the likes of Nvidia, which boasts a P/E of 55.7, the issue magnifies considering Nvidia’s projected 138% EPS growth in the current fiscal year versus Tesla’s projected EPS contraction in 2024.

Many investors roost in Tesla for its alluring prospects beyond the EV realm–from self-driving software and humanoid robots to solar power generation and battery storage. While these domains forecast immense potential, Tesla’s reliance on EV sales, dominating 78% of its revenue, mandates a meticulous focus on its core operations.

With Tesla stock necessitating a 54% slump from current levels to align its P/E ratio with the Nasdaq-100, venturing into Tesla investment at this juncture braves a risk-laden voyage. A potential downturn triggered by dwindling EV deliveries looms large, especially if the horizon presents a bleak outline for 2025.

Contemplating Investment in Tesla: A Crucial Decision

Before delving into the realm of Tesla stock, a prudent word of caution carries weight:

“The sole fact that some investors place their hope in the allure of Tesla’s futuristic ventures beyond the EV domain dances in limelight. Yet, with 78% of revenue streaming in from EV sales, prudence warrants a keen eye on the current trajectory. The stormy waters ahead could test the mettle of Tesla investors, shedding light on the potential implications of a shrinking EV sales forecast. In this intricate dance of market dynamics, foresight and cautious navigation remain indispensable virtues.”