The trouble with Tesla

For most of the last decade, Tesla has been an amazing stock to hold. If you’d bought $100 of Tesla shares when the company was first listed on the stock exchange in 2010, you would have $13,268 today. Even versus five years ago, the company’s stock is worth eight times more.

Most of this is based on little more than the fact a lot of investors like Elon Musk a great deal. Tesla is worth more than the next six biggest carmakers combined, despite selling far fewer cars than most of them.

Tesla’s valuation then – in 2021 it became the sixth company in US history to be worth $1 trillion – has never really been based on anything so mundane as how many cars the company sells or how much money it makes. Instead, it has essentially been a bet on how great you think Elon Musk is.

That proposition is being tested in a way unlike it has ever been tested before, though, because the problems of Tesla as a regular old carmaker are mounting. With Tesla stock down by more than a third from its all-time highs, it is not clear how long it will be until something has to give.

The optimistic case, the one that justifies the incredible exuberance of the stock price, is that Tesla is not really a car company but is instead a robotics and artificial intelligence company. Full self-driving could revolutionise multiple industries, while Musk has paraded around various unimpressive walking robot ‘prototypes’ at public events, even if one of those was just an employee in a robot costume.

The idea of this scenario is that investing in Tesla is investing in Elon Musk – but this one doesn’t really fit reality. When Musk has a different idea, he puts it in a different company: SpaceX does rocket launches, Starlink is satellite internet, Twitter/X is social media, and Musk has various other endeavours too.

At some point, Tesla investors will realise that whatever value Tesla generates will have to come from its cars – a previous effort to expand the company to supply home solar electricity systems ended in dismal failure. Similarly, for all that Musk endlessly promotes self-driving, the software for this has stalled considerably short of what is required to actually drive autonomously and safely without driver attention.

All of which means that Tesla is stuck in the game of making cars and then selling them. For a long time, Tesla was so good at the second of these two skills that the first became a major problem for the company – waiting lists grew to several years for some popular models, as Tesla couldn’t manufacture them fast enough to make demand.

Tesla has always found it more difficult than it expected to ramp up demand, and it has been plagued by quality issues as it has done so – searching Twitter for “Tesla” and “fault” or similar is always revealing.

This, though, is where this week’s results should have been good news for Tesla: it is making more cars than ever, even if that’s still far fewer than its mainstream rivals. The new problem for Tesla is that it seems to be struggling to find people to buy those cars – its inventory of unsold cars is growing.

Tesla is suffering from two different trends here: demand for new electric cars is falling for a plethora of reasons, including that finance is now more expensive, and that customers want to wait for better charging infrastructure. The second is that there are far more rivals making electric cars now, so Tesla’s market share is falling and the market itself isn’t getting much bigger.

Where does that leave Tesla? With too many cars on its hands, production capacity it’s not all that clear it needs, and with a damnably ugly truck as its only new model in years to boot. Tesla stock has been a great investment for over a decade, but gravity is just as real in economics as it is in physics: what goes up will, eventually, always come down.