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Tesla (TSLA) has experienced a massive rally in the last 6+ months, with year to date (YTD) gains of 125%. The stock is among the top five best performers in the S&P 500 (SPY) stocks of the year. TSLA has also now recouped most of its 2022 losses, even as it is still below the 2021 highs. While TSLA stock has not shown signs of slowing down, there are several risks that investors should pay attention to.
Tesla is among the most fascinating, yet controversial stocks. While a section of the market that includes long-time bulls like Cathie Wood believes that not only is the company’s current valuation justified but it can rise even further, there is another section that includes “valuation purists," such as Ashwath Damodaran, who finds it hard to justify Tesla’s valuation.
But this tussle between bulls and bears is nothing new and Wall Street has always been divided on the Elon Musk-run company.
The divergence in Wall Street analysts’ opinion is best reflected in TSLA’s mean target price:
It has a mean target price of $228.48 but there is a wide gap between the street-low target price of $85 and a street-high target price of $305. Wood incidentally believes that TSLA stock could rise to $2,000 by 2027 under her base case scenario.
Wall Street analysts have always been divided on Tesla
It’s quite hard – if not outright impossible – to find any other stock which has such a difference of opinion among analysts.
Of the 24 analysts that cover TSLA, 7 rate it a Strong Buy, 1 a Moderate Buy, 14 a Hold, and 2 a Moderate Sell. The divergence in analysts’ target price reflects how they view the company. While those in the bearish camp value it as an automaker, bulls see it as a tech company.
In my view, Tesla is a mix of both an automotive company and a technology company. This complexity in Tesla’s business also means that the risks that investors face are also commensurate.
Key risks that Tesla investors face after the massive 2023 rally
In my view, there are six key risks that Tesla investors face.
- Tesla might not be able to grow its deliveries at a CAGR of 50% that Musk previously touted. The company missed its 2022 delivery forecast and its production has been ahead of deliveries, which seems to suggest that Tesla is no longer a demand constrained company like it once was.
- Tesla hasn’t faced much overwhelming competition so far from legacy automakers as well as other pure-play electric vehicle (EV) companies. However, with almost all automakers ramping up their EV production, the competition in the EV industry is set to heat up even further.
- I believe that the EV price war might only get brutal and Musk has signaled that Tesla is willing to compromise on the margins in order to scale up deliveries. Its operating income and margins incidentally fell steeply YoY in Q1 2023 due to the price cuts. Tesla’s valuation premium also comes from its industry-leading margins which are at risk from the price war and the resultant margin compression.
- Things don’t appear to be smooth for Tesla in China anymore and Musk has admitted that there are constraints on expanding capacity in the country. China Gigafactory is not only Tesla’s most productive plant but the country is the second biggest market for the EV giant.
- On a related note, Chinese automakers are giving a tough fight to Tesla, and BYD (BYDDY) has raced ahead to become the biggest seller of new energy vehicles – even as its battery electric vehicle sales are less than Tesla. Xpeng Motors has also priced its G6 SUV around 20% below Tesla Model Y aiming to eat into the best-selling model’s market share in China.
- Tesla hasn’t launched a new model since the Model Y in 2020 and the Model 3 which helped the company achieve scale is also aging. Tesla’s Cybertruck is running behind schedule and Musk expects it to enter mass production in 2024 only. While Musk has said that Tesla is also working on a low-cost platform, we don’t have many details.
- Finally, by Musk’s own admission, autonomous driving accounts for the bulk of Tesla’s valuation. However, so far, the company’s full self-driving (FSD) hasn’t reached full autonomy even as the name suggests so. Musk has on multiple instances said that the company is very near full autonomy – including during the Q1 2023 earnings call where he said that Tesla’s autonomous driving might reach full autonomy by the end of 2023. In my view, Tesla stock is now more or less pricing the full autonomy and a negative surprise would be a key risk for the stock.
Elon Musk’s antics are also a risk for Tesla investors
One of the reasons Tesla stock crashed in 2022 was Musk’s acquisition of Twitter and the widespread belief that the social media company was taking a lot of his bandwidth. While Musk has since handed over the CEO baton to Linda Yaccarino, he continues to remain the Chief Technology Officer of the microblogging site.
Musk still seems closely involved with Twitter though and recently sparred with Mark Zuckerburg after Meta Platforms (META) launched Threads – a Twitter-like platform that could shake up the social media landscape.
Musk has also launched his artificial intelligence (AI) company xAI and given his enthusiasm for AI, I believe it might take a significant chunk of his time.
Another aspect worth considering would be the 2024 US presidential elections. Musk has supported Ron DeSantis and also hosted him on Twitter Spaces where the Florida Governor officially launched his 2024 bid.
Musk’s vocal support for conservatives had irked many on the other side of the political divide. I fear that as the 2024 campaign heats up, we might see more political tweets from Musk which might have an impact on TSLA's stock price.
Incidentally, even Wood who is arguably the biggest Tesla bull, said earlier this year that many people won’t buy Tesla cars after his Twitter antics. If Musk takes an even partisan stance ahead of the elections, in my view, it would have a negative impact on the Tesla brand which is so closely interwound with him.
On the date of publication, Mohit Oberoi had a position in: XPEV , META , SPY . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
