The recent, astonishing rally in Tesla (NASDAQ:TSLA) shares is faltering. And just like many previous boom-and-bust cycles, the electric carmaker only has itself to blame.
Tesla plunged more than 6% on Friday, to $333.04, after having gained more than 40% since the company reported a surprise profit for the third quarter on Oct. 23. What made investors nervous this time was Thursday’s unveiling of the “Cybertruck,” which failed to live up to analysts’ expectations.
CEO Elon Musk had helped develop the hype about the new vehicle, claiming it would take significant market share from existing producers, led by Ford (NYSE:F) and General Motors (NYSE:GM). The attempt certainly makes sense as Americans love their pickup trucks — making this segment of the market highly lucrative for incumbents in otherwise very challenging demand conditions.
But Tesla also needed to show it will be ahead in this game through its innovative design capabilities and cost effectiveness, especially when rivals in its electric sedan business are about to make a meaningful entry. Instead, Tesla’s truck reveal has so far produced more critics on Wall Street than admirers.
“Tesla’s Cybertruck looks weird … like, really weird,” Bernstein analyst Toni Sacconaghi wrote in a scathing note to investors, after the event. “Musk had warned investors that Tesla’s pickup would be ‘really futuristic, like cyberpunk Blade Runner,’ and he wasn’t kidding.”
Though there is no dearth of loyal Tesla fans who will still buy the new truck despite its highly unusual design, many analysts were skeptical that the sale potential could challenge both Ford and GM.
Analysts at Evercore ISI estimate it would be tough for Tesla to hit 50,000 units in two years, when the company is planning to start selling the truck. If that happens, the sale of Tesla’s pickup trucks should add $2.5 billion in sales — a number that market has already factored into the existing consensus revenue estimate for 2022 of almost $42 billion, according to Bloomberg data.
“Musk has been enthusiastic about his Blade Runner-inspired design for months, but we were still surprised how futuristic he went with this one and believe it may shatter his dreams,” according to Cowen analyst Jeffrey Osborne.
One major reason analysts are concerned about Tesla’s truck model is that it’s hard to predict whether the carmaker will be able to deliver on its promises. It has a history of missing its own deadlines with many missteps, including Musk’s botched attempt to take the company private early this year, ongoing troubles at its SolarCity project and exaggerated numbers about its car production targets.
Though the company was able to deliver a surprise profit in the third-quarter, its path to meaningful profitability still remains fraught with danger. Tesla bulls who sent the stock soaring have ignored the fact that revenue was actually down on both a sequential and year-over-year basis in the third-quarter. While announcing its Q3 earnings, Tesla also cut its guidance for the year — it now expects to deliver more than 360,000 vehicles this year versus an old range of 360,000 to 400,000.
Due to Tesla’s unreliable track-record on deliverables, we have been warning investors that the current rally in its shares is not reliable and could unravel at the first sign of trouble. The stock currently trades at 75 times forward earnings estimates, about 10 times what Detroit-based rivals fetch. What we have here is a high degree of hope that the carmaker, one day, will deliver and show the level of growth that will justify its current value.
Tesla’s stock remains a highly speculative bet. Its premium valuation compared to industry peers is hard to justify when the overall demand picture remains muddy and the company continues to face deep cash-flow issues. We don’t think Elon Musk has been successful in changing that equation by launching his Cybertruck and creating a lot of hype about its sale potential.