With Competitors Closing In, Will Tesla Turn a Corner in 2023?

PUBLISHED Jan 21, 2023, 1:35:11 PM        SHARE

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As the new year dawns, investors are struggling to see what’s around the corner for beleaguered EV juggernaut Tesla.

Hailed as the new darling of Wall Street during the pandemic, Tesla joined Meta and Amazon as one of big tech’s biggest losers in 2022.

Stung by a string of untimely supply-side snafus and hampered by a sustained bear market, Tesla closed out 2022 with a year-to-date loss of around 65%, according to Stock Rover*. After crossing into the trillion-dollar club in 2021, it has seen its market cap crumble to under $ 400 billion over the past year.

The precipitous plummet in Tesla’s price was ruinous for CEO Elon Musk, who experienced one of the most significant wealth losses in modern history. Musk not only lost over $200 billion in just over a year but also ceded his position as the world’s richest person to Bernard Arnault. Tesla’s 2022 crash represented an unprecedented reversal in the 52-year-old’s eventful multi-decade journey to fortune.

Competitors Are Catching Tesla

Though Tesla hit several nasty potholes over the year, from Musk’s chaotic Twitter takeover to China’s zero-Covid lockdowns, a longer-term threat has now emerged in Tesla’s rearview mirror – competition.

After gaining the first-mover advantage as an EV pioneer, Tesla’s lead over its competition is waning as other automakers catch up fast.

Tesla’s competitors include traditional automakers, such as Ford, General Motors, Volkswagen, and Toyota, and pure-play EV makers, like BYD, Nio, Polestar, Lucid, and Rivian.

Tesla’s competitors are gaining both in its home market and abroad. In the United States, where Tesla remains the market leader, EV sales ballooned by around 85% from 2020 to 2021. Yet while the pie has grown fast, Tesla has struggled to keep the lion’s share.

While Tesla held about 80% of the US market in 2020, its share dropped to 71% in 2021, according to national vehicle registration data. The percentage of Teslas among all registered EVs then declined to around 65% during the first nine months of 2022.

Tesla is also facing more competition in China – the world’s largest EV market. Chinese EV brand BYD, for instance, overtook Tesla in gross sales, reaching over one million units in the first three quarters of 2022, including plug-in hybrids. Behind BYD are Chinese brands Nio and Li Auto, both achieving new record levels for vehicle production in the last quarter of the year. There are upcoming brands from other emerging markets, too, like Vietnam’s Vinfast, which recently filed for an initial public offering (IPO) in the US and has plans to expand in Europe next year.

Stock Price U-turn

Considering its meteoric rise during the pandemic, Tesla’s stock price may have been long overdue for a course correction. At the end of 2020, Tesla had an astronomically high price-to-earnings (P/E) ratio of 966, meaning the price of a Tesla share was 966 times its equivalent per-share earnings. The average P/E of S&P 500 Index stocks for that year, by contrast, ranged between 25X to 40X.

The buying frenzy for Tesla, fueled by speculation about its future growth rather than its fundamental profitability, created all sorts of bizarre statistics. For example, when Tesla surpassed the trillion dollar mark for the first time in late 2021, its market cap was greater than the following ten largest automakers combined. Yet, its total car sales were less than 2% of the other ten companies.

In this sense, Tesla is a typical tech growth stock rather than a car company. Unlike its more established rival automakers, Tesla doesn’t pay dividends, instead following the Silicon Valley norm of reinvesting its profits to fuel further expansion. As a result, Tesla’s bull case diverges markedly from Warren Buffet’s value investing strategy, which espouses buying up undervalued companies with solid dividend yields.

Tesla’s Outlook

The outlook for 2023 remains unclear. While the recessionary environment is likely to drag down growth stocks like Tesla further, there may be silver linings yet.

Despite the rising competition, most EV brands are yet to make inroads into the premium end of the market – Tesla’s real territory.

For instance, while BYD overtook Tesla in overall sales last year when it comes to profit margins, Tesla still leaves this Chinese competitor trailing in the dust. BYD’s margin is just under $1,200 per vehicle. Tesla’s is over eightfold more – nearly $10,000 per unit.

Yet some see a bull case to be made. Morgan Stanley analysts see Tesla widening its lead over other EV brands and note the company will enjoy outsized benefits from the incoming Inflation Reduction Act (IRA) bill.

Others, like Deutsche Bank, don’t see the road getting smoother in the coming quarter, yet maintain that the company is well positioned to weather the current macroeconomic downturn and has various cost levers to protect its high margins.

Can Tesla Maintain Its Lead Over the Competition?

Whether or not Tesla’s price can bounce back and reach the record highs of yesteryear may come down be whether or not it can make its vehicles the iPhone of EVs. If it, like Apple, can continue to convince consumers its cars are in a league of their own and maintain dominance over the high-end segment, it may sustain impressive growth for investors over the long term. Yet, if it succumbs to the pressures of stiffening competition in an increasingly crowded market pool of contenders and becomes just another EV brand.

Given the high stakes for the company and the uncertain state of the economy heading into 2023, Tesla’s price trajectory will be followed closely by investors in the coming year.

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