Elon Musk’s visionary outlook for Tesla often conjures comparisons to tech giants like Apple and disruptors like Saudi Aramco. However, recent developments suggest that Tesla may be veering closer to the trajectory of established automakers like Toyota Motor, presenting a conundrum for investors.
Toyota Motor, renowned for its stellar manufacturing prowess and consistent profitability, trades at a modest valuation of just 10 times estimated 2025 earnings. In contrast, Tesla’s stock commands a premium valuation of 43 times, reflective of its rapid growth trajectory. Yet, as Tesla’s growth rate moderates and profit margins come under pressure, the valuation gap between Tesla and traditional automakers like Toyota could narrow significantly.
Musk acknowledges that Tesla is navigating a transition between two major growth phases. The initial surge stemmed from the Model 3 and Y platform expansion, while the second phase hinges on the introduction of a more affordable Tesla model. However, Tesla’s operating profit margins for 2024 are projected to lag behind Toyota’s by about 3 percentage points, signaling a shift from the robust margin levels seen in previous years.
Gary Black, co-founder of the Future Fund Active ETF and a Tesla shareholder, questions the rationale behind paying a premium for a company experiencing decelerating growth. Analysts anticipate Tesla’s earnings per share to decline to $2.80 in 2024, down from $3.12 in 2023, before rebounding to $3.88 in 2025. Wall Street’s downward revisions in Tesla’s earnings estimates, exacerbated by recent delivery misses, reflect waning investor confidence in Tesla’s growth prospects.
The diminishing growth trajectory has prompted a reassessment of Tesla’s valuation multiples. While Tesla’s sales are forecasted to double over the next five years, the anticipated growth rates pale in comparison to earlier projections. This shift underscores the importance of growth rate declines in shaping investor sentiment and valuation metrics.
However, Tesla’s valuation remains intertwined with its narrative as more than just an automaker. The company’s ambitious pursuits in software, robotics, energy, and artificial intelligence contribute to its mystique, complicating attempts to gauge its intrinsic value. Consequently, any adverse developments, such as disappointing quarterly results, fuel uncertainty among investors, potentially amplifying valuation pressures.
Despite the recent setbacks, Tesla’s stock exhibited resilience in midday trading, rebounding from initial declines prompted by disappointing delivery results. Nonetheless, the overarching narrative surrounding Tesla’s evolution and its implications for valuation dynamics continue to fuel market volatility and investor apprehension.