Investors are reassessing the premise that justified Tesla’s astronomical stock price and made its founder, Elon Musk, the richest person on the earth.
Tesla’s $1 trillion valuation made sense provided that investors believed the electrical automotive company was on a path to dominate the auto industry the best way Apple rules smartphones or Amazon commands online retailing.
But Tesla’s shares have declined greater than 40 percent since April 4 — a much steeper fall than the broad market, vaporizing greater than $400 billion in stock market value. And the tumble has called attention to the risks that the corporate faces. These include increasing competition, a dearth of latest products, lawsuits accusing the corporate of racial discrimination and significant production problems at Tesla’s factory in Shanghai, which it uses to produce Asia and Europe.
Mr. Musk has not helped the stock price by turning his bid to purchase Twitter right into a financial soap opera. His antics have reinforced the perception that Tesla lacks an independent board of directors that might stop him from doing things that may damage the corporate’s business and brand.
“From a company good governance perspective Tesla has lots of red flags,” said Andrew Poreda, a senior analyst who focuses on socially responsible investing at Sage Advisory Services, an investment firm in Austin, Texas. “There are almost no checks and balances.”
Even longtime Tesla optimists are having doubts. Daniel Ives, an analyst at Wedbush Securities, has been probably the most steadfast believers in Tesla on Wall Street. But on Thursday, Wedbush lowered its goal price for Tesla — the firm’s estimate of the shares’ fair market value based on future earnings — to $1,000 from $1,400. Mr. Ives cited Tesla’s problems in China, where lockdowns have throttled the availability of crucial parts and materials and demand for cars.
“There’s a latest reality for Tesla in China, and the market is reassessing the risks,” Mr. Ives said.
Production problems in China have undercut one in all the rationales for making Tesla the world’s most useful automotive company. Tesla vehicles have been successful with Chinese buyers, fueling hopes of supercharged growth on the earth’s largest automotive market. Tesla’s market share in China topped 2.5 percent in the primary quarter of 2022, closing in on luxury carmakers Mercedes-Benz, BMW and Audi.
But supply chain headaches in China are compounded by flagging consumer demand, said Michael Dunne, chief executive of ZoZoGo, which advises firms on the electrical automotive market.
Chinese consumers “are edgy, they’re nervous in regards to the future,” Mr. Dunne said. “It’s a double whammy that Tesla confronts in China.”
Tesla shares are reacting partially to the identical forces which can be roiling stock markets all over the world: war in Ukraine, rising rates of interest, the specter of recession, supply chain chaos and surging inflation. But Tesla shares have fallen rather more than other Silicon Valley giants like Apple or Alphabet, the corporate that owns Google.
Tesla accounted for three-quarters of the electrical cars sold in the US last 12 months. The corporate is several years ahead of competitors in battery technology and software. But two models — the Model 3 sedan and Model Y sport utility vehicle — accounted for 95 percent of Tesla’s sales. Its next consumer vehicle, a pickup truck, has been delayed again and again and shouldn’t be expected until next 12 months on the earliest.
It’s an axiom within the automotive industry that latest models fuel sales. And competition from the likes of Hyundai, Ford and Volkswagen is growing, offering drivers many more selections.
Jesse Toprak, an auto industry veteran who’s chief analyst at Autonomy, an organization that gives electric cars by subscription, said that Tesla’s market share will fall below 40 percent by the top of 2023, though its sales will proceed to grow as the general market expands.
“They are going to have a smaller share of a bigger pot,” Mr. Toprak said. “But their near-monopoly on E.V. sales within the U.S. will slowly diminish.”
Tesla already faces tough competition in Europe, where electric vehicles account for 13 percent of latest automotive sales. That foreshadows what could occur in the US, where sales of battery-powered cars are only starting to take off. Volkswagen, which has invested heavily in electric vehicles, sold 56,000 battery-powered cars in Western Europe in the course of the first three months of the 12 months, just behind Tesla, which sold 58,000, in response to figures compiled by Schmidt Automotive Research in Berlin.
Tesla’s ability to serve the European market will improve as a latest factory near Berlin ramps up production. In the US and elsewhere, the corporate has benefited from fanatically loyal buyers who regard Mr. Musk as a visionary and are willing to attend months or years for the corporate’s cars.
But as electric cars gain popularity due to skyrocketing gasoline prices, the following wave of consumers will not be as tolerant or as enamored of Mr. Musk. “The subsequent generation of buyers might be average Joes who’re buying E.V.s since it makes financial sense to them,” Mr. Toprak said. “The brand image of Tesla might be less helpful.”
Tesla’s image is under pressure in ways that might hurt the automaker among the many environmentally conscious, politically liberal customers who’ve long been its biggest customer base. The California Department of Fair Employment and Housing is suing Tesla, accusing it of allowing racial discrimination and harassment to flourish at its factory in Fremont, Calif., near San Francisco. Tesla is contesting the lawsuit.
In one other blow, the S&P 500 ESG Index, a list of firms that meet certain environmental, social and governance standards, ejected Tesla last month. S&P said it was disturbed by claims of racial discrimination and poor working conditions at the corporate’s Fremont factory.
Mr. Musk responded to S&P’s decision by writing on Twitter that the movement to use environmental, social and governance standards to corporations a “scam” that “has been weaponized by phony social justice warriors.”
Mr. Musk followed that Twitter post by declaring that he was switching his allegiance from the Democratic Party, which he said had “turn out to be the party of division & hate,” and would now vote for Republicans. Politically charged statements like those are certain to alienate some automotive buyers.
“The more political he becomes, the more that may begin to influence buyers,” said Carla Bailo, chief executive of the Center for Automotive Research in Ann Arbor, Mich.
Mr. Musk and Tesla didn’t reply to requests for comment.
Management turnover is one other risk. Mr. Musk is a notoriously demanding boss who has warned Twitter employees that “work ethic expectations can be extreme” if he takes over the social media platform.
The churn at Tesla is clear. Lots of its former senior managers are distinguished within the start-up scene within the San Francisco Bay Area. Examples include Celina Mikolajczak, head of producing at fledgling battery maker QuantumScape, who previously helped develop batteries at Tesla, and Gene Berdichevsky, one other former Tesla battery developer who’s chief executive of Sila Nanotechnologies. Sila announced this week that it could supply materials for advanced batteries to Mercedes-Benz.
Lucid, maker of the one electric model to beat Tesla within the Environmental Protection Agency’s tests of how far an electrical automotive can go on a full charge, was founded by Peter Rawlinson, a former top Tesla engineer until he fell out with Mr. Musk. Lucid’s headquarters is in Newark, Calif., a brief drive from Tesla’s Fremont factory.
Mr. Musk’s admirers say he has helped promote emission-free vehicles by seeding the industry with talent. But critics see a risk that Tesla won’t ever develop a stable echelon of experienced managers who can run the corporate if anything ever happens to Mr. Musk.
“You’ll be able to’t treat your employees poorly in a good labor market like we’ve got,” said Mr. Poreda of Sage Advisory. “One vivid man can’t make his vision into reality without lots of really smart people.”
Amid this litany of problems and risks, Mr. Musk has been spending time on acquiring Twitter, though he currently appears to be having second thoughts in regards to the deal. The foray into social media has some investors wondering why the boss is spending a lot time writing missives on Twitter while the world burns.
“There may be just a sense,” said Mr. Ives of Wedbush, “that the pilot on the plane is watching some Netflix show when you’re going through a large thunderstorm.”