• Tesla reports earnings on April 23 after market close

• Weak delivery data set the ground for downbeat financials

• Valuation is overstretched despite a 35% YTD stock decline

Devastating start to the year

Tesla has been steadily among the ten worst performing stocks of the S&P 500 in 2024 as investors have been raising concerns over the firm’s growth outlook. Since the beginning of the year, Tesla shares have shed around 35%, jeopardising the electric car manufacturer’s spot within the so-called ‘Magnificent 7’ pack.

This significant underperformance is mainly attributed to increasing competition from both traditional automakers and new entrants within the EV space, which have been gradually stealing market share from Tesla. Moreover, as AI continues to be the main growth lever in the economy, Tesla’s limited exposure to such products has been acting as an additional headwind.

Quarter highlights

Tesla’s vehicle deliveries were disappointing for the first quarter, falling 8.5% against the same period last year and marking the first annual decline since 2020. Such a decline in terms of volume seems harsh, given that the leading EV manufacturer has implemented a series of price cuts since early 2023 to retain growth in the expense of profit margins.

Although Tesla attributed this softness to a temporary shutdown of the German factory following a power outage and supply bottlenecks due to Houthi attacks in the Red Sea, the firm’s management appears to be acknowledging that it could be entering a phase of slower growth. In a corporate memo recently sent by Elon Musk, it was announced that the global workforce will be reduced by more than 10% to cut operational costs and boost productivity as the company is transitioning to a new growth era.

Meanwhile, investors are awaiting the Q1 earnings call for an official update on the progress of the AI-powered self-driving taxi, called robotaxi, following Musk’ recent remarks that it would be unveiled on August 8, 2024.

Profitability shrinks

The lack of growth coupled with narrowing margins are going to be reflected in the quarterly financial performance. Specifically, Tesla is on track for a 3.6% annual decline in its revenue, which could reach $22.49 billion. Meanwhile, earnings per share (EPS) are forecast to fall from $0.85 in the same quarter last year to $0.51, posting a 39.40% drop.

Valuation doesn’t properly reflect risks 

Although Tesla is facing a clear downturn, the firm’s valuation seems excessive even when compared to the leading AI firms. The carmaker’s shares are currently trading at almost 54 times what analysts expect earnings to be next year, while both its growth and profitability are expected to remain under severe pressure as competition in the EV market is unlikely to dissipate soon.

Moving forward, the successful launch of the autonomous driving software seems to be the only wildcard Tesla can play to turn things around. Nevertheless, as there is still uncertainty over the proper completion of this project, there seems to be significant room to the downside for Tesla’s stock if financial figures keep disappointing.

Where will the decline stop?

Tesla’s stock has been in a steady decline since July 2023, dropping to a fresh one-year low in the latest trading session. Hence, all eyes will fall on the upcoming Q1 earnings announcement as a potential upside surprise could apply brakes on this long-term downtrend.

In case of upbeat financials, the stock could advance towards the recent resistance of $184.00. Even higher, the February peak of $205.00 could curb further upside attempts.

Alternatively, bearish actions could send the price lower towards the April 2023 bottom of $152.40. Should that barricade fail, there is no prominent support until the 2023 bottom of $102.00.