Tesla’s stock price dropped 9.75% yesterday, just following the release of Tesla’s Q1 report and conference call for shareholders. It’s down 11.4% across 5 days. There’s a lot of discussion about why Tesla’s stock is down so much, with at least half a dozen reasons being commonly put out there. Naturally, some explanations are more common among Tesla [NASDAQ:TSLA] bears and some explanations are more common among Tesla bulls. Overall, it’s an interesting time in the evolution of Tesla as a company, and I think that’s being reflected both in the stock market response to Tesla’s Q1 results and in the discussion about that response.
A tweet from Gary Black — a highly followed Tesla stock commentator, Managing Partner of The Future Fund LLC, and an SEC-registered investment adviser — perhaps captures the debate best. It lays out four potential reasons for Tesla’s demand elasticity not being higher (a matter our own Vijay Govindan explained well two weeks ago).
Notably, before discussing those individually, it’s important to note here that all of these imply a dampening of demand that’s beyond what Wall Street expected, and especially beyond what Wall Street expected in light of the recent price cuts (we’ve counted 6 price cuts in the US in 2023 so far). There’s another argument that Tesla is still selling all the vehicles it can make and it’s just cutting prices because its costs have been coming down. I don’t think that argument is very compelling, but many do.
I swear people aren’t reading the tweet… new car prices are at ALL TIME HIGHS and UP 10% YOY
— TSLATALK (@tslatalk) April 20, 2023
There is a marketplace where 1,130,000 gas vehicles were sold in the past 30 days at prices higher than what Tesla is selling for.
Tesla is struggling to sell 70,000 a month at prices WELL below average selling prices.
Not sure how this is so complicated.
— TSLATALK (@tslatalk) April 20, 2023
Also, this discussion about these matters implies that lower-than-expected Tesla demand elasticity is the sole or main reason for the stock’s drop. There could again be other factors at play. Perhaps it’s lack of more notable progress on Full Self Driving (FSD) and yet another comment from Elon Musk that he thinks it will be really robotaxi-ready this year — like, really really, not like when he said that almost every year (or perhaps every year?) for the past 4 or 5 years or so. Perhaps, combined with FSD stagnating, the stock drop was related to Musk’s focus on the value of the company being based on robotaxi capability and software sales. Or perhaps it was another matter — no significant news on a $25,000 Tesla, no big numbers on the Semi or Cybertruck rollout, no big updates to Tesla’s older models? We don’t know.
It seems that more likely than not, though, the stock market is concerned about Tesla’s demand elasticity, repeated price cuts, and dropping profit margins and operating margin. So, let’s return to Gary Black’s poll.
First up: Lots of new competition
This first one is an argument that has been on the boards for several years. In fact, there used to be frequent stories about so-called “Tesla killers” with just about every EV announcement. They were laughable back then, but nowadays, this argument might carry more weight. Electric vehicles are indeed becoming more mainstream. Thanks, Tesla! And thanks also to Ford (see F-150 Lightning and Mustang Mach-E), GM (see Chevy Bolt EV/EUV), Volkswagen (see ID.4), and others. The non-Tesla electric vehicles on the market now are much more capable and compelling than the ones from a few years ago. And people are buying them. True — definitely not as much as they’re buying Teslas. However, I see new ones on the street almost weekly — from the BMW iX in my area with dealer plates to the Hyundai IONIQ 5 that just joined the school pickup line to the new Ford F-150 Lightning living a block away from me to the Volkswagen ID.4 my aunt and uncle just bought.
The days of laughing at the competition are over, in my opinion. That said, the core competition is still gas-powered cars, trucks, and SUVs, and Tesla still has plenty of room to grow while eating their lunch. But perhaps not as much as we thought a couple of years ago when the EV competition was much weaker.
EV early adopters bought (their EVs already)
This argument goes at it a bit differently. The idea is there’s a much lower cap on EV demand than expected, and now Tesla isn’t able to sell as much as the stock market was expecting. I don’t find this very compelling. At 6% EV market share in the US, compared to about 20% in Europe and China, the US is at the early stages of the EV adoption curve and there’s no reason to believe gas-powered vehicles can compete with electric vehicles as word of mouth gets around.
These are two very different things combined in one. In fact, it’s not clear what Gary Black is referring to with the term “ubiquity.” However, he has been pushing very clearly and persistently for a couple of things that apply here. He’s been pushing for Elon Musk to get out of political nonsense as Musk has been more and more engaged in proliferating far-right-wing talking points and conspiracy theories. He’s been pushing for Musk to disentangle himself from culture wars. And he’s been pushing for Tesla to use traditional advertising (i.e., TV advertising) to help improve brand awareness, debunk myths, and reach new audiences. Presumably, the point in this poll option is that Tesla’s brand has been sullied by Elon Musk’s foray into extremist politics, conspiracy theories, and culture wars; and also that it has not been spread appropriately to more eyes in a positive, productive way. All of that could be limiting sales, price cuts or not.
The option that got the most responses was “the economy,” a broad matter. There was then some significant pushback from people who don’t think the economy is the biggest factor, including Black himself. Reportedly, the housing market is bouncing back and new car prices are at an all-time high in the United States.
People citing the economy are wrong. https://t.co/2F2TmowzHQ
— TSLATALK (@tslatalk) April 20, 2023
However, there’s an economic matter at play that no doubt has a role in damp demand. Interest rates are still really high, after having risen rapidly, and people don’t want to buy new cars and get locked into high interest rates. I have a friend who needs a new car but she’s waiting a few months with the hope interest rates will come down. This is quite common, especially for those of us who need to finance our cars. As Derek in the tweet below is arguing, this is a big part of the dampened demand and the limited effect of dropping prices. Lower prices may be tempting, but lower prices combined with lower interest rates would be much more tempting. Perhaps many potential buyers are waiting for this.
if you don't think the fastest repricing of credit in history has anything to do with lower demand you are the wrong one. its not the only contributor, but certainly playing a big role.
— Derek (@derek_rafht) April 20, 2023
I think it’s safe to say sales will jump significantly when interest rates drop again, even if prices rise again. However, will they jump enough to excite the stock market? Will Tesla’s stock price rebound to Q1 (or earlier) levels as interest rates come down, or sooner? Do any of these issues really matter, or did Tesla stock drop based on “buy the rumor, sell the news” and herd mentality? Will the stock price jump again today or next week for no clear reason? We shall see. The future can be unpredictable, especially when it comes to the stock market.
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