Earlier this month, an analyst apparently decided to ruffle some feathers and issued a shockingly low price target for EV stock Tesla (NASDAQ:TSLA). A hedge fund manager stated that the company could “go bust,” immediately raising eyebrows. While it’s doubtful that such a severe bear case could materialize, investors likely need to meet halfway with the pessimists.
Mainly, there are rising concerns that market participants must acknowledge. Tesla features a very rich premium that might not be justified. Moreover, economic difficulties have resulted in reduced demand, which is simultaneously occurring against the backdrop of rising competition. With such headwinds, I am bearish on TSLA stock.
Is TSLA Stock Worth Only $14?
Clean Energy Transition’s Per Lekander, a managing partner at the investment management firm, declared boldly, “This was really the beginning of the end of the Tesla bubble, which probably, arguably was the biggest stock market bubble in modern history.” The comment came after Tesla reported 386,810 vehicle deliveries in the first quarter of the year, well below even the least optimistic estimate.
Overall, the consensus delivery figure was set at 457,000 vehicles. To be fair, there were some outside factors that contributed to the decline. For one thing, factory shutdowns occurred due to shipping diversions stemming from the Red Sea conflict. In addition, an arson attack occurred at Tesla’s Gigafactory in Berlin.
Nevertheless, Lekander – who has been shorting TSLA stocks since 2020 – didn’t mince his words. “I actually think the company could go bust,” the hedge fund manager stated. He took matters even further, suggesting that Tesla shares could fall to $14. In Lekander’s opinion, Tesla is a “no growth” stock and should be valued at 10 times forward earnings.
Currently, TSLA stock trades at nearly 60x forward earnings.
Now, it’s difficult to declare that Tesla would incur a ~92% loss of its equity value. That’s what a $14 price target implies. Fundamentally, the company brand has likely become too ingrained in the collective consciousness to see such a severe discount. Basically, whenever people think about EVs, they first think about Tesla.
Still, that doesn’t mean investors shouldn’t give a thought to Lekander’s bearish call. While a $14 price target was likely stated for shock value, a more reasonable decline isn’t out of the question. Frankly, if electric mobility was performing so well, legacy automakers wouldn’t be scaling back their EV ambitions. However, that’s exactly what’s happening, which makes TSLA stock a difficult pill to swallow.
An Obvious but Critical Headwind Shows Up to the Party
If one had to pinpoint the main headwind working against TSLA stock, it would be the simple and obvious answer: EVs cost too much. Yes, one could make the argument that because EVs feature far fewer moving parts, they don’t impose the frequent maintenance costs associated with combustion-powered vehicles. So, over time, EV drivers should win out financially, even with the heightened upfront cost.
However, it’s the upfront cost that matters so much to Americans right now. For years, households have struggled with blisteringly hot inflation and elevated borrowing costs. Now, those who have enjoyed working at high-paying tech jobs have recently witnessed their livelihoods axed. Overall, it means that fewer people are able to afford electric-powered vehicles.
Unfortunately, for TSLA stock, the worst headwind may be what the underlying enterprise considered an attribute: fewer moving parts. One of the main reasons to transition to Tesla was that drivers didn’t have to deal with oil changes and paying for increasingly pricey gasoline. However, this advantage isn’t exclusive to Tesla.
In particular, anybody else could come in, develop an electric motor, and get up to running relatively quickly. It’s one of the key reasons why investors have seen so many EV startups enter the public market. More critically for TSLA stock, the ease by which companies can produce electric-powered vehicles means that Chinese competitors may soon dominate the space.
No, Chinese EV brands don’t command the same social cachet as Tesla; let’s stay on Earth here. However, we’ve also got to be realistic. There is simply no way that Tesla or any other Western company can match the sheer volume that Chinese companies can generate.
To be clear, it’s not because of a lack of capability. Rather, the political climate has become more attuned to issues such as social equity. A return to a bottom-line-only focus is just not in the cards for Western enterprises.
Revisiting TSLA Stock’s Valuation
As stated earlier, TSLA stock trades at a forward earnings multiple of nearly 60x. In contrast, the average trailing-year earnings multiple for the auto manufacturing space is only 18.19x. Granted, it’s not a pure apples-to-apples comparison. Nevertheless, it gives an idea of just how much of a premium Tesla commands.
Of course, TSLA stock certainly deserves a premium for the social cachet I mentioned above. The question is whether TSLA should be trading at a higher or lower premium than it currently enjoys. Without getting into hyperbole, Tesla’s valuation likely should be cheaper.
Let’s look at the basic framework. EV demand is falling while competition is rising. With consumers having struggled financially for years, they will easily eschew social cachet for a better price. Such a dynamic benefits Chinese competitors, not TSLA stock.
Is TSLA Stock a Buy, According to Analysts?
Turning to Wall Street, TSLA stock has a Hold consensus rating based on nine Buys, 19 Holds, and seven Sell ratings. The average TSLA stock price target is $196.72, implying 13.5% upside potential.
The Takeaway
When Per Lekander stated that TSLA stock could fall to $14, I believe the sentiment was expressed for shock value. It worked. However, investors shouldn’t dismiss the narrative outright. While Tesla probably won’t fall that far, it suffers from fading demand and rising competition. Given the ease by which EVs can be manufactured, this competition will likely only accelerate. And that means investors must consider reassessing TSLA’s valuation.
