To say that 2022 was a rough year for Tesla (NASDAQ:TSLA) is something of an understatement. In fact, it was its worst on record and has got some commentators announcing the beginning of the company’s decline. A year ago, Tesla was valued at $1.2trn, almost the combined value of all other carmakers. Since that peak, Tesla stock fell 72% over the course of 2022, including a 7% drop at the year’s close.
Elon Musk also ignobly shed some $200bn of personal wealth. Much has been made of the behaviour of its maverick CEO, and his controversial acquisition of Twitter is often used to explain Tesla’s poor fortune.
This has some validity; Musk sold $23bn of Tesla stock to fund the Twitter acquisition. If advertisers continue to flee Twitter, he may need to finance debt payments with further sales, despite him promising no more until 2024. A U-turn on this would be a severe blow to his credibility and Tesla’s share price.
Major investors have also expressed concern at his time commitment to the social network. It is simplistic but tempting to pin the prospects of Tesla to its CEO, who appears larger than life and is able to make cryptocurrency and shares ebb and flow according to his social media activity.
However, the Twitter saga, though colourful, is only part of the picture. Tesla’s nightmare year is more due to a perfect storm of macro factors and slow progress on future products. It is a reckoning that has been coming for some time as the gap between production and deliveries has widened. Lots of things need to go right for it to grow into its huge valuation, a feat that is unlikely in difficult conditions, which leaves it vulnerable to price corrections.
Fears of a global recession have depressed luxury car demand worldwide, and the USA’s used car market has tanked, offering cheaper options to cash-strapped consumers. Chinese demand is also set to fall amid a punishing Covid wave and stuttering economy. Now not even bullish investors have faith in Musk’s promise to make 20 million cars by 20230.
Moreover, it is becoming apparent that Tesla’s much touted “Autopilot” is not on the verge of becoming a revolutionary self-driving system. Failure of a wide FSD (Tesla’s automated driving system) rollout and regulatory struggles have emphasised that wholesale adoption is a while off.
The delays to the much-vaunted Cybertruck have left investors doubly disappointed. With innovation slowing, Tesla’s rivals have had a chance to catch up. For instance, Volkswagen has released the ID.7 to provide competition for Tesla’s entry level Model 3.
Hence, Musk’s antics only bear limited responsibility for Tesla’s difficulties. Despite sometimes hysterical headlines, a sense of perspective is important. The company is not down and out by any means.
In its nightmare year, it still delivered 1.3 million cars, a 40% increase on 2021 and opened two new factories. It is still far and away the most valuable carmaker. Its decline is relative, not absolute. That is why I am not ruling out adding Tesla shares to my portfolio.
Tom Hennessy has no position in Tesla. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023