The EV bubble burst: Tesla looks to the future but wait to buy in

Key Points

• Tesla had a tough time in Q4, with price reductions impacting the top and bottom lines. 
• Demand for EVs has slacked off; Tesla execs caution that 2024 will be slow. 
• Analysts are cutting their targets and ratings, weighing heavily on the price action. 

If the last year of price cuts and sluggish sales weren’t enough to tip off the market to the fact the EV bubble has burst, Tesla’s NASDAQ: TSLA Q4 results and outlook for 2024 should do it. The company isn’t ailing per se; it is still growing, but the Wild West days of ramping production to match sales growth are over. As great as the result could be, EVs have become a nightmare of problems for many users. Among the most prevalent is cost. Even with tax incentives and price cuts from OEMs, the initial cost and maintenance of an EV outpaces an equivalent ICE, and then there is the charging issue. 

As Marketbeat.com contributor Chris Markoch has said, there just isn’t enough charging infrastructure to keep EVs on the road. This problem will persist until there is an EV charging station at every major intersection, which will take some time. And money. And the major OEMs are all cutting back on their EV plans, so the incentive for others to invest is diminished. An advance in battery technology would also be a boon. 

Manufacturers like Amprius Technologies NYSE: AMPX and Enovix NASDAQ: ENVX made advancements with silicon-anode lithium-ion batteries, enhancing their energy density, discharge rate, and charging speed. Will it be enough to sustain interest in EVs, and can they make enough batteries to move the needle now? The answer to that is no. Both are making advancements and ramping production, but it will be years before they have enough capacity.

The future is hybrid; vehicles must have an easily recharged/refueled power supply that isn’t tethered to the grid for most consumers to see its value. Connection to the grid is a non-starter for long-term adoption for numerous reasons. That’s why so many OEMs have hybrid models, are expanding their hybrid line, or have hybrids in design. Hydrogen could be the answer, but it's in worse shape than the battery-electric market regarding infrastructure and capacity.

And almost none of either market is really green; EVs are net-bad for the environment without green electricity. Plug Power NASDAQ: PLUG has made great advancements in green hydrogen, but the focus of the problem is money. Plug Power has been burning through cash for years and has yet to reach critical mass. 

Plug Power has that critical mass in its sights but doesn’t have enough money to achieve its goal. The last earnings report included a going-concern notice still overhanging the market. As it is, Plug is looking for billions in additional funding that include a potential 60% dilution of shareholder value and indebtedness to the government. 

Growth slows at Tesla 

Tesla had a solid quarter regarding business stability, but growth is slowing and profitability is ailing. The company reported $25.17 billion in net revenue for a gain of 3.5% compared to last year, 230 bps short of the consensus and the slowest pace in many quarters. Sales were positively impacted by volume and negatively impacted by pricing, highlighting issues within the industry; it’s harder than ever to grow sales within the EV market, and Tesla is warning that 2024 will be slow. 

The price reductions also impacted the margin. The company’s adjusted EPS of $0.71 is down versus last year and short of the consensus despite solid top-line growth. The company expects to launch its next-generation manufacturing process soon and lower overall costs, but those effects may not be seen for several quarters at the earliest. Redwood, a mass-market car teased in the earnings call, wouldn’t be available until 2025, so it isn’t a catalyst now. 

Non-core business helps sustain growth at Tesla; no help for share prices now

Investors shouldn’t forget that Tesla isn’t just a car company. It is investing in its technology, including AI, and its non-automotive businesses are performing well. The Storage and Deployment business grew 10% YOY, with power generation profits up nearly 4X and Services growth of 27%, generating profits instead of losses. Those segments account for 14.3% of the Q4 revenue, up 2% YOU. 

Analysts' sentiment is capping gains and weighing on the market. The stock received numerous downgrades and price reductions over the last two months that have it on Marketbeat’s Lowest Rated Stocks list. The consensus forecasts about 10% after the post-release price plunge but is trending lower and may fall further now that the results are in. The market is still above critical support and may move sideways within a range, but there is risk. The market is moving lower and will likely retest support, possibly breaking through. In that scenario, Tesla's share price could fall to $160 or lower, shedding another 15%+ off the price.