Margin Fears Drag Tesla's Valuation Below $500 Billion

Tesla Inc. shares have continued to fall precipitously, bringing the company's market worth below the crucial half-trillion dollar level as investors grow increasingly concerned that its price-cutting strategy would eat into profitability.

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In New York, the stock price plummeted as much as 3.5% to $155.03 and is on track to end at its lowest level since January 25. If the slide continues until the end of the regular session, the company's market valuation would have dropped by more than $70 billion in five trading sessions after reporting poor earnings. The stock has dropped by more than 25% in April alone.

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Tesla published first-quarter numbers on Thursday that fell short of analysts' forecasts in practically every statistic. Most notably, profit margins shrank, demonstrating the impact of the company's aggressive price-cutting policy. Investors were particularly alarmed when Tesla CEO Elon Musk stated that the company will continue to drop pricing to entice potential purchasers. 

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"Despite significant price cuts, demand for Tesla still appears challenged, and price elasticity appears to be more muted than Tesla believed," Bernstein analyst Toni Sacconaghi said in a note Thursday. "We continue to believe that price cuts have and will continue to undermine industry profitability (including Tesla's), but that incumbents are well-funded and unlikely to back down."

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Wall Street analysts slashed their price targets in response to the news, citing the dangers to Tesla's premium valuation amid a rapid erosion of profit margins. Bulls frequently highlight the company's excellent margins as one of the primary reasons why the stock deserves to trade at a much higher multiple than competing manufacturers.  

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This year has been a roller coaster ride for Tesla stock. After completing 2022 with a 65% drop that dropped its worth to roughly $340 billion in early January, the stock recovered for two months as the company's market capitalization soared to over $670 billion. 

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However, that confidence dissipated in early April when first-quarter delivery figures revealed that the price cuts were not raising demand as much as predicted. Then, last week's full results emphasized the argument even more.

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Falling Behind

Meanwhile, Exxon Mobil Corp. is breathing down the EV maker's neck on the S&P 500 leaderboard, as it approaches the $500 billion mark for the first time since 2007. LVMH, the luxury goods juggernaut, is also in the running. 

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The firms switching spots, whether temporarily or permanently, underscores the increased volatility in Tesla shares. One possible explanation is the company's premium valuation - the stock trades at 42 times forecast earnings, compared to Exxon's 12 and LVMH's 25 — which leaves little room for mistakes.  

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Still, others on Wall Street regard the selloff as a transient hiccup caused by broader macroeconomic factors. Longer term, they believe Tesla's still-high margins will position it better than competitors to withstand this storm.  

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Cathie Wood, CEO of Ark Investment Management and enthusiastic Tesla supporter stated last week in an interview that her price objective for the company in 2027 is $2,000.  

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"While skeptics may focus on less than 20% automotive gross margin, we think an obsession with this metric is unwarranted," Piper Sandler analyst Alexander Potter said in a note. "Once the dust settles, Tesla should bounce back." 

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