Tesla Risks Doing Something It Hasn't Done Since Launching the Model S, and It Could Trigger a Big Move in Its Stock

Tesla (NASDAQ: TSLA) is one of the world's largest manufacturers of electric vehicles (EVs), but its stock is down 39% from its all-time high, which was set during 2021, and it continues to underperform the S&P 500 index this year.

Tesla is facing several challenges relating to EV demand, competition, and rapidly slowing sales growth. In fact, the company's annual EV deliveries could shrink in 2024 for the first time since it started producing its flagship Model S in 2011.

Tesla stock still looks extremely expensive despite its decline since 2021. Here's why an annual drop in EV sales could be the trigger for even further downside.

Tesla is having a tough year

Tesla's total EV deliveries sank 6.5% in the first half of 2024 relative to the same period last year, and the company just announced its third-quarter deliveries, which fell short of Wall Street's expectations. Those results look even worse when you consider Tesla has slashed its prices over the past year to spur demand.

The price cuts have led to a steady decline in Tesla's gross profit margin, which is now down by half compared to its peak three years ago. In other words, lower prices have failed to ignite the company's sales growth, and they have significantly dented the company's profitability.

But those challenges aren't unique to Tesla. Sales of EVs overall plunged 44% in Europe during August, with their market share slipping to just 14% from 21% in the same month last year. Plus, car manufacturers like General Motors and Ford Motor Company have slashed billions of dollars in planned investments into their EV segments, citing soft demand.

Tough economic conditions headlined by high interest rates might be pushing consumers into cheaper gas-powered cars instead.

But competition is another big headwind for Tesla. Manufacturers in countries with low production costs -- like China-based BYD -- are churning out EVs at price points that Tesla simply can't compete with. The BYD Seagull, for example, sells for under $10,000 in China, and it's likely to enter Europe in 2025.

Tesla has a big presence in both China and Europe, so it's feeling the pressure. That's why the company plans to launch a low-cost EV of its own next year that could be priced at just $25,000. It probably won't be enough to displace the Seagull, but it might entice low-income consumers who want a more premium product.

Tesla's deliveries are at risk of an annual decline

Tesla began production for its flagship Model S in 2011, and it delivered 2,600 of them to customers in 2012. Thanks to the company's expanding fleet, which now includes the Model 3, Model Y, Model X, and Cybertruck, its deliveries have grown every year since then.

In 2023, Tesla delivered a record 1,808,581 cars, a 38% increase from 2022. While it was a strong result, that growth rate was notably slower than the 50% annual growth CEO Elon Musk was targeting.

Plus, because of the recent challenges I highlighted earlier, Musk didn't provide a forecast for 2024, which left some analysts predicting deliveries could come in at around 2.2 million. That implies growth of just 22% compared to 2023, which would be even further below Musk's 50% target -- but there's an even bigger problem.

Tesla delivered just 1,293,656 cars in the first three quarters of this year, meaning it needs to deliver a record 514,925 cars in the final quarter of the year to beat last year's number. If it fails to do so, deliveries will shrink on an annual basis for the first time since it launched the Model S.

Image source: Tesla.

Tesla stock looks extremely expensive right now

Based on Tesla's trailing-12-month earnings per share (EPS) of $3.56, and its stock price of $249.27 as of this writing, it trades at a price-to-earnings (P/E) ratio of 70. That's more than twice the 32.1 P/E ratio of the Nasdaq-100 technology index, which is representative of Tesla's big-tech peers.

It also makes Tesla more expensive than Nvidia, which trades at a P/E ratio of 55.7. Here's the big issue: Nvidia is on track to grow its EPS by a whopping 138% in its current fiscal year, whereas Tesla's EPS is forecast to shrink in calendar 2024. From that perspective, it makes absolutely no sense for Tesla stock to command such a premium to the rest of the tech sector.

Many investors own Tesla stock for its future potential outside of the EV industry. The company is a leading developer of self-driving software, humanoid robots, and solar power generation and battery storage. Those segments could be extremely valuable in the future, but Tesla's EV sales account for 78% of its total revenue today, so investors simply can't ignore what's happening in its core business.

Tesla stock would have to decline by 54% from its current price just to bring its P/E ratio in line with the Nasdaq-100, which means investors who buy it at the current price are potentially exposing themselves to a significant correction if sentiment takes a negative turn. Shrinking annual EV deliveries could be the trigger, especially if analysts don't see any growth on the horizon in 2025.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BYD Company, Nvidia, and Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.