The shares of Electric Vehicle giant Tesla has been on a downward spiral in April, dragging the company’s market valuation below $500 billion. Media reports said on Wednesday that investors are fretting over the company’s price-cutting strategy and the consequent hit on its profit margins.
Tesla shares fell 3.5 percent to $155.03 in New York, marking its lowest level since January 25. If the loss continues, the company’s market valuation will drop by more than $70 billion in five trading sessions since reporting poor earnings. The stock is down more than 25 percent in April alone.
The first-quarter results reported by Tesla on Thursday missed analysts’ expectations on almost every metric, with profit margins plunging due to the company’s aggressive price-cut strategy. Tesla CEO Elon Musk has indicated that the company will continue to lower prices to lure potential buyers of its vehicles, despite the challenges to demand.
According to Bernstein analyst Toni Sacconaghi, Tesla’s demand appears to be limited despite a significant drop in prices. Wall Street analysts have already reduced their price targets in response to the news, citing the risks to Tesla’s premium valuation amid a sharp erosion of profit margins. Supporters point to the company’s good margins as a rationale for the stock’s greater multiple than other automakers.
Tesla’s shares have experienced considerable volatility for the last few months, starting with a 65 percent drop at the end of 2022, which pushed its valuation to around $340 billion in January. The stock rebounded rapidly for two months, increasing the company’s market capitalization to over $670 billion. However, the first-quarter delivery numbers indicated that price cuts were not boosting demand as much as expected. The full results reported last week made that point even more evident.
Despite this, some analysts believe the selloff is a temporary blip caused by broader macroeconomic pressures. Cathie Wood, CEO of Ark Investment Management, recently told CNBC that her 2027 price target for the stock is $2,000. Piper Sandler analyst Alexander Potter remarked that “once the dust settles, Tesla should bounce back”.
Amid declining valuation and profit margins, it will be interesting to see Elon’s next move.
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