Shares of automotive giant Tesla Inc (NASDAQ: TSLA) are currently trading around $345, down roughly 30% from their December highs and stuck in a grinding downtrend that shows little sign of reversing. What initially looked like a healthy pullback in January has increasingly resembled something more long-term, with each rally attempt being sold into and lower lows being set.
At the start of the year, there was a clear narrative shift underway. Investors were beginning to buy into Tesla’s positioning as a robotics and automation company rather than just an electric vehicle (EV) manufacturer. That reframing helped support the company’s triple-digit valuation and resilient bullish sentiment, but in recent weeks, that optimism has started to fade.
Weak delivery data, released this week, has brought the focus back to the core business, and a lack of meaningful results from the pivot to automation means the bulls have little to hold onto. All that means that, with a little less than two weeks until its next earnings report, it looks like things could get worse for Tesla before they get better. Let’s jump in and see exactly what’s going on.
Weak Deliveries Bring Focus Back to the Core Business
This week’s delivery report will have been a kick in the teeth for Tesla investors, coming as it did after what was already turning into a brutal first three months of the year. Expectations weren’t exactly high, but the numbers were still disappointing, reinforcing concerns around slowing demand and increasing competition in the EV market.
When Tesla’s pivot towards its long-term autonomy and AI narrative was being backed by Wall Street, short-term fluctuations in deliveries like this were easier to overlook. Now, with that narrative having lost some momentum, investors are once again anchoring their expectations to the company’s core automotive business.
A Premium Valuation Means Even Less Room for Error
That wouldn’t be all that bad if it weren’t the case that, even after the recent pullback, Tesla’s valuation is still pretty frothy. With a price-to-earnings ratio sitting well above 300, the stock is still priced for significant future growth, meaning there’s little room for disappointing updates like this week’s delivery report, or continued question marks over the path to profitability with its autonomy and robotics plans.
That being said, there are still some analysts who believe in the company’s potential. It was only this past week that the team at Deutsche Bank was reiterating its Buy rating, arguing that the current weakness is an opportunity rather than a warning sign. However, that has to be balanced against this week’s update from JPMorgan, which reiterated its Sell rating, echoing the move from BNP Paribas last month.
Price Action Suggests More Pain Could Be Coming
The common trend among the bears is that Tesla’s weakening fundamentals and premium valuation don’t make for a good combination. The chart’s ongoing downtrend, which saw fresh lows being hit this week, suggests they may have a point. Technically, the stock has been making a series of lower highs and lower lows since December, and until that trend shows signs of wanting to change, it’s difficult to be bullish.
At the same time, sentiment is becoming increasingly negative, with the stock’s relative strength index currently flirting with extremely oversold levels. That creates an interesting setup for those of us on the sidelines.
On the one hand, Tesla’s fundamentals and price action point to further downside risk, but on the other hand, you could make an argument that the worst-case scenario is close to being fully priced in. Historically, this is exactly where it's paid to be a Tesla bull, as the company loves proving the naysayers wrong even while bearish conviction peaks.
Earnings Will Be Key
That means the company’s upcoming earnings report, due on 22 April, now takes on added importance. With expectations having come down considerably and sentiment as low as it’s been in a while, the potential for an upside surprise isn’t all that high.
Investors will be looking closely for any signs that the company’s longer-term strategy around autonomy, robotics, and AI is beginning to translate into tangible progress. At the same time, updates on margins and EV demand trends will be critical in determining whether the core business is stabilizing.
If Tesla can deliver even modestly better-than-expected results while providing a clearer path forward, the stock could start finding some demand. That said, if the report fails to do so or reinforces current concerns, the existing downtrend could easily see fresh lows. With the stock still trading with a premium multiple, the market’s unlikely to be forgiving.
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The article "Tesla: Why Things Could Get Worse Before They Get Better" first appeared on MarketBeat.
