Tesla shares suffer worst year ever. And 2023 looks bad, too

A year ago, Tesla Inc. seemed unbeatable, with its shares near a record high amid soaring optimism for the global electric-vehicle market. Now investors are struggling to see a bottom.

The stock was never for the faint of heart, given its volatility and the mercurial style of its chief executive, Elon Musk. Still, the magnitude of this year’s rout is staggering: It’s lost more than 60% through Tuesday’s close, on pace for a record annual decline, and erasing about $626 billion of shareholder value.

Two years to the day after Tesla joined the S&P 500 Index, investors are confronting a new reality. Competition from established major automakers is intensifying, threatening Tesla’s dominant market share. Analysts also see little in the pipeline to reignite the sort of rabid demand for the shares seen back in 2020. Meanwhile, the stock is some 40% below the level at which it joined the benchmark.

“This whole narrative about Tesla being a leader in everything they do is waning,” said Jeffrey Osborne, an analyst at Cowen & Co. who has the equivalent of a hold rating on the stock. “Tesla shares tend to work best when you can create a feverish narrative about something coming. It is unclear what is to be excited about it in the new year.”

The company’s highly anticipated driving software and its battery technology are both falling short of their timelines, the analyst noted. Meanwhile, the futuristic design of its Cybertruck can make it a tough sell as a mainstream vehicle. Tesla didn’t reply to an emailed request for comment.

Analysts have been scrambling to reassess their outlook given the stock’s freefall, more modest earnings expectations and the overall reset in valuations of growth companies: Wall Street’s average price target for Tesla has now sunk to the lowest in more than a year.

The stock fell 8.1% Tuesday to $137.80, its weakest since November 2020, after Evercore ISI and Mizuho Securities became the latest to slash projections. On Wednesday, it briefly dipped below $136.03, the level where the shares were trading in November 2020 when S&P Dow Jones Indices announced that the stock would be included in the S&P 500 Index.

Given the stock’s dive, the average analyst target of about $259 — which is a far cry from the record close of $409.97 touched in November last year — implies a roughly 90% gain over the next 12 months from Tuesday’s close, suggesting there may be room for that gap to narrow.

It’s a stunning reversal from a year ago, when Tesla was valued at almost $1 trillion, earnings were consistently beating expectations and demand for EVs seemed poised to soar with more countries announcing green-energy policies.

“Investors are projecting a phenomenal increase in revenue numbers along with an expansion in manufacturing capacity,” said Bruce Kahn, a portfolio manager at Shelton Capital Management, which held about 236,000 Tesla shares as of the end of September. The expectation is that sales could go from 1 million cars to 3 million, but the “reality is, not yet.”

Of course, tech shares have suffered broadly as the Federal Reserve hiked interest rates to tame inflation, sparking angst over a possible recession.

But in part because of worries that a downturn could crimp demand for costly electric vehicles, Tesla shares have been among the weakest. Only Meta Platforms Inc. has posted a steeper decline among the 10 NYSE FANG+ Index members.

Musk’s purchase of Twitter Inc. made matters worse as concern grew that his preoccupation with the social-media platform was reducing his focus on Tesla. He also sold off a chunk of his shares to help finance the deal.

Yet when it comes to valuation, Tesla is still the fourth-most expensive stock on the NYSE FANG+ Index, trading at a forward multiple of 33 times estimated 2022 earnings.

The company is worth almost $440 billion, far bigger than any other major global carmaker. Japan’s Toyota Motor Corp., the second-biggest, is valued at about half that. Toyota is estimated to sell 8.9 million cars in fiscal 2023, ending March 31, while Tesla deliveries for calendar 2022 are expected to be around 1.3 million vehicles, data compiled by Bloomberg show. Granted, the bulls point to Tesla’s much fatter margins.

“Tesla is still trading like a tech company, as a high-growth company, whereas other auto manufacturers are not,” said Shelton’s Kahn. “The valuation still looks rich, because people think the EV complex will grow exponentially and Tesla will be one of the major players in it.”

To some, it all suggests there’s room for the stock to fall further. Momentum certainly isn’t on Tesla’s side. No development has managed to buoy the shares for long in 2022, from the decision to split the stock or dangling the possibility of a share buyback. Musk’s Twitter poll about stepping down as CEO of that company also failed to stem the slide. And his subsequent confirmation on Tuesday that he will indeed resign from the position hasn’t sparked any major relief rally.

It’s a time of reckoning for Tesla investors, many of whom see Musk’s ability to drive the company to success as forming the foundation for its potential. That partly explains why in a year when Tesla’s earnings are expected to grow more than 80% and revenue to expand nearly 55%, the dive in the shares has been so deep.

“From a brand perspective, Elon Musk is Tesla and Tesla is Elon Musk,” said Robert Schein, chief investment officer at Blanke Schein Wealth Management, which owns Tesla shares. “The more Elon uses Twitter in a political manner, the more he is potentially tarnishing the Tesla brand.”

Schein, who expects the company to be a leading EV player in the long-term, is waiting for the stock to fall further to add shares.

“If Tesla falls 15% to 20% from here, we are buying,” he said.