With shrinking profits and underperforming shares, Tesla Inc. is facing increasing scrutiny as it becomes an outlier among its mega-cap technology peers.
According to a report by Bloomberg, investors are particularly concerned ahead of the company’s third-quarter earnings report, which could solidify Tesla’s role as the weakest link in the so-called “Magnificent Seven.”
Tesla is expected to report earnings today after markets close.
Declining profits and estimates lower confidence
Tesla is the only member of the Magnificent Seven expected to post a decline in profits for the latest quarter, while the other six companies — Amazon, Microsoft, Apple, Alphabet, Meta, and Nvidia — are all projected to grow.
Wall Street analysts have steadily lowered their estimates for Tesla’s earnings, further highlighting the company’s struggles.
In contrast, the shares of its tech counterparts have surged in 2024, while Tesla’s stock has dropped by 12%.
Despite its stock woes, Tesla remains the most expensive company in the group based on earnings, trading at 74 times forward earnings.
This high valuation sets a challenging stage for the company to impress investors with its upcoming results.
The third-quarter report, due Wednesday, could have had a softer impact if Tesla had managed to generate excitement earlier this month with its much-anticipated robotaxi reveal.
However, the event failed to meet expectations, leaving investors concerned about Tesla’s ability to maintain its innovation edge.
“Investors are starting to lose patience with Tesla, especially after the robotaxi event that was long on idea, but short on execution, and as growth expectations from their core business remain low over the next two years,” David Wagner, portfolio manager at Aptus Capital Advisors said in the report.
EV sales slowdown continues to weigh on Tesla
One of the main challenges for Tesla is the slowdown in electric vehicle (EV) demand, which has been declining since late 2023.
Inflation, rising borrowing costs, and concerns about an economic slowdown have led consumers to cut back on large purchases like cars, including EVs.
While Tesla responded to this environment by aggressively cutting prices to attract buyers, the strategy has not been enough to fully revive demand.
Revenue for the third quarter is projected to be about $25.4 billion, reflecting an 8.9% year-over-year increase.
However, analysts expect earnings per share (EPS) to fall by 10%, landing at 60 cents per share compared to 67 cents in the previous quarter and down from $1.09 a year ago.
Additionally, Tesla’s automotive gross margin, a key metric closely watched by investors, is forecast to remain under pressure, with estimates of 14.9% for the third quarter, just slightly above the 14.6% posted in the second quarter.
“The most important factor for the stock in the short term is if demand trends come in above or below expectations and if gross margins are above or below,” said Cole Wilcox, portfolio manager at Longboard Asset Management in the report.
He added that while Tesla remains strong in the EV market compared to competitors, “EV demand is not the explosive high-growth category it once was.”
Analysts cautious on Tesla’s prospects
As Tesla navigates these challenges, some analysts have warned that a strong recovery for the stock might be unlikely without more visibility into the company’s longer-term growth prospects.
Piper Sandler analyst Alexander Potter believes that catalysts for a bullish re-rating of the stock may not appear until next year when Tesla is expected to unveil new products and potentially secure regulatory approval for its advanced driver assistance software in key regions like China.
“Regardless of the third-quarter result, we think a sustainably bullish re-rating may not occur until investors have reasons to boost estimates,” Potter wrote in a note to clients.
Despite these concerns, many investors believe Tesla’s place among the Magnificent Seven remains intact due to its reputation as an innovator and its potential to revolutionize the auto industry with self-driving vehicles.
However, the company’s latest earnings report could be crucial in shaping how investors perceive Tesla’s future role in the tech elite.
“Tesla’s upcoming earnings are crucial, but they’re part of a larger picture,” said Adam Sarhan, founder and CEO of 50 Park Investments.
For now, it’s too early to dismiss Tesla from the Mag 7, but the pressure is certainly on for the company to prove its worth.
With investors losing patience and a clear roadmap for growth still uncertain, Tesla will need to impress both on the earnings front and with its product innovations to maintain its position in the competitive tech landscape.
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