The EV Bubble Bursts: Tesla’s Profits Crash

Tesla’s Overvaluation

Tesla ( $TSLA), once the darling of the stock market not too long ago and a symbol of the EV Bubble, is now facing a harsh reality. At today’s price of $237 per share (after market hours on July 23, 2024), the stock is significantly overvalued, with a price-to-earnings (P/E) ratio of 63 and a forward P/E ratio of 74. Despite its market dominance, the company offers no dividend yield, raising serious questions about its long-term value proposition at today’s price.

Earnings Miss and Profit Plunge

Tesla’s recent earnings report paints a bleak picture. The company reported adjusted income of $1.8 billion for the quarter, or 52 cents per share, missing analysts’ expectations of 62 cents per share. This represents a sharp decline from the 91 cents per share earned a year earlier. The company’s profits plunged more than 40% year-over-year, a steeper drop than anticipated, highlighting the tougher environment for electric vehicle (EV) sales.

Revenue for the quarter stood at $25.5 billion, essentially flat compared to previous periods. However, this was achieved despite a 5% decline in the number of vehicles sold. Tesla’s adjusted profit margin, excluding interest, taxes, depreciation, and amortization (EBITDA), was trimmed to 14.4%, down from 18.7% a year ago. This marks the second consecutive quarter of year-over-year sales declines, an unprecedented situation for the company since it went public.

The EV Market Saturation and Demand Woes

The EV market is facing a critical juncture. Early adopters who were eager to switch to electric vehicles have largely already made their purchases, leading to a saturation point. The broader consumer base is showing signs of fatigue, exacerbated by rising interest rates and dwindling consumer savings, which have now reverted to pre-pandemic levels.

Tesla’s once-exponential growth is now being challenged by established automakers entering the EV space with competitive offerings. In the second quarter, Tesla sold less than half of all US EV sales for the first time in years, according to sales tracker Edmunds. A few years ago, the company dominated this market. This shift is a clear indication that consumer demand for EVs is waning, and the market is no longer as receptive as it once was.

Competitive Pressures and Market Share Losses

Tesla’s dominance in the EV market is being eroded by growing competition from established automakers. Companies like Ford, General Motors, and Volkswagen are now offering their own EV models, often at more competitive price points. This increased competition is putting pressure on Tesla’s market share, forcing the company to cut prices, which in turn squeezes profit margins.

In its earnings report, Tesla did not provide a new sales target for the full year. However, it warned that “In 2024, our vehicle volume growth rate may be notably lower than the growth rate achieved in 2023.” This cautious outlook is hardly surprising given the drop in sales volume over the first half of the year.

Market Valuation Concerns

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