Is it Tesla time again?

There’s no denying that 2022 was a pretty torrid year for Tesla’s investors. Shares fell back a whopping 65% – a trajectory that left many nursing big losses. The changing fortune of the electric car maker which has become a retail investor favourite was particularly disconcerting as its share price performance since 2020 had delivered some pretty spectacular returns.

But alongside tales of Tesla-made ISA millionaires there were plenty of commentators who warned the bubble was likely to burst, that the company was massively overvalued, and any setbacks would result in the stock underperforming.

Last year those commentators were proved right. China’s zero-Covid policy not only impacted production in Asia but it also dented sales there, just at the time that raging inflation was eating into discretionary income in the West.

Chip shortages gave way to a production glut and, with its boss seemingly distracted with his new social media toy, Twitter, the company had to take serious strategic action and reach for the sale stickers.

Back in the driving seat?

It was a strategy that appears to have paid off, at least for now. Tesla’s fourth quarter earnings boasted record profits, record deliveries and a forward order book that Elon Musk referred to as “high”. He noted there are “a vast number of people who want to buy a Tesla car but can’t afford it” so the recent price changes are likely to widen the pool of potential buyers.

The company’s share price enjoyed its best week in almost 10 years before the earnings update and more than one recommendation jumped from hold to buy, with the latter camp now overwhelmingly in the majority. But there are still a number of Tesla bears, with five analysts keeping their feet planted firmly in the sell camp.

Tesla share price performance over the past five years

SOURCE: Refinitiv

Plenty of potential potholes

It’s not unusual for there to be a spread of broker recommendations but it does raise questions about Tesla’s outlook.

Using price to stoke demand has already had an impact on margins which were shaved to a two-year low of 25.9% in the last quarter, and those discounts were only just beginning to filter through.

The EV giant expects to continue with its rapid growth spurt, though its own forecasts suggest at a slightly slower pace. Last year it delivered just over 1.3 million vehicles and this year the company is forecasting a 37% increase to 1.8 million, though the company’s controversial boss believes two million is well within reach.

But using price to stoke demand has already had an impact on margins which were shaved to a two-year low of 25.9% in the last quarter, and those discounts were only just beginning to filter through.

Tesla’s advantage has been eroded by time. Tesla is no longer the new kid on the block, the disruptive start up with the wind in its sails.

Speculation mounted that the move to cut prices wouldn’t just affect profitability, it would also spur on competitors to follow suit and Ford was the first to jump, cutting the price on its Mustang Mach-E crossover in the last few days, though GM has stated it won’t be pulled into the fray.

And competition might just be the strongest headwind to buffet Tesla over the next year.

The car industry has been in a state of flux as the world transitions from the combustion engine. Established players have been slow to act – something which gave Tesla a distinct advantage. But that advantage has been eroded by time. Tesla is no longer the new kid on the block, the disruptive start up with the wind in its sails.

China’s BYD actually overtook Tesla last year as the leading seller of electric cars. Traditional giants like Hyundai, Ford and General Motors have put their foot on the accelerator, and new entrants like Rivian and Lucid in the US, and China’s Nio, are giving customers greater options.

Tesla has promised new models, but put them on the back burner to focus on supply chain issues and boosting production, leaving investors dangling and customers perhaps a little bored.

The next generation is apparently in the works, as is an “economy” model and there’s news that the long-awaited Cybertruck pick-up will begin production later this year.

The investor day at the beginning of March could quiet many critics but it won’t do much to sweeten the bad taste left in many new Tesla owners’ mouths. Nobody likes to miss out on a bargain, or find they’ve paid over the odds for something they could have got much cheaper if they’d just waited a few more weeks.

And a week is a long time on markets, with shares in the company still firmly riding the roller coaster and with the media reporting that some people feel “embarrassed” to be seen in their Tesla because it’s so intrinsically linked with Elon Musk, who is himself (at the time of writing) waiting to find out what a court makes of tweet he sent claiming he had funding ready to take the company private in 2018.

There are many variables at play and all need to be considered when looking at Tesla as an investment. Can Tesla’s pricing strategy mitigate softening consumer demand? Will the company’s divisive CEO ultimately be found to be hero or villain? And has future growth already been priced in, something of particular concern when the company’s PE is stratospherically high?

The proof will be found in the order books and with China reopening, the US offering substantial subsidies, and Europe considering if it will fight back with its own intervention, 2023 will be a year to watch.

Past performance is not a guide to future performance and some investments need to be held for the long term.