It’s crucial not to overreact to a single quarter’s performance. Nevertheless, it is equally important not to squander a crisis.
Tesla is currently confronting a significant challenge: the fading of Elon Musk’s infamous “reality distortion field.” This crisis holds more weight than many investors realize, and it is imperative that the automaker takes swift action to counteract this issue.
In his 2011 biography on Apple co-founder Steve Jobs, Walter Isaacson discussed the concept of Jobs’s Reality Distortion Field (RDF). This phenomenon had the ability to make individuals in the industry believe in seemingly impossible feats. Remarkably, Isaacson also observed that Musk serves as a generator of his own RDF in his 2023 biography on the electric vehicle pioneer.
Within the context of Tesla, Musk’s RDF has successfully convinced investors that the company is much more than just an ordinary car manufacturer. According to Musk, Tesla is an “AI robotics company,” with the added nuance that Tesla vehicles essentially embody four-wheeled robots.
For Tesla, being more than just a car company is crucial because, frankly, the automobile manufacturing sector is not an ideal business. Auto analyst Mike Ward from Freedom Capital Markets, who has been following the industry for decades (though he does not cover Tesla specifically), asserts that building cars is capital-intensive, labor-intensive, competitive, regulated, cyclical, and characterized by low growth.
In the past, during a period with less competition, building cars was considered a profitable venture. In the ten years following World War II, General Motors achieved a net profit margin of approximately 8%, while experiencing an average annual sales growth of nearly 15%. However, in the decade leading up to the Financial Crisis, which ultimately forced General Motors into Chapter 11 restructuring, the company only managed to maintain an average net profit margin of 1%, with sales growing by less than 3% annually.
Comparably, Tesla’s recent track record is reminiscent of post-war General Motors. Since becoming consistently profitable in 2020, Tesla has maintained an average profit margin of around 13%, while achieving a staggering 45% annual sales growth. However, the company is now confronted with challenges related to profit margins and sales growth. Analysts on Wall Street project that Tesla’s margins for the next three years will average around 10%, coupled with a sales growth rate of less than 20% annually. The realities of the automotive industry are beginning to settle in.
It is worth noting that Steve Jobs never faced industry dynamics quite like those confronting Tesla. Since the introduction of the iPhone in 2007, Apple has steadily maintained a net profit margin averaging approximately 23%. Additionally, over that period, Apple’s sales have expanded by roughly 15 times. (It is conceivable that the strength of an RDF might be proportional to absolute profit levels.)
In conclusion, addressing Tesla’s current crisis is crucial for the company’s future success. The fading RDF must be acknowledged and managed effectively to navigate the challenges ahead. Tesla needs to evolve beyond being solely an automaker and find innovative ways to thrive in an increasingly competitive industry landscape.
Tesla’s Communication Challenges
Tesla is facing a significant hurdle in maintaining investor confidence due to its communication struggles. In the past, Elon Musk’s grandiose statements about Tesla’s potential have been enough to sway investors. However, this approach is no longer sufficient.
Analysts, such as Dan Ives from Wedbush and Gary Black, a Tesla shareholder, highlight the circus-like atmosphere surrounding recent conference calls and emphasize the frustration it has caused. The general consensus is that poor communication is at the root of the problem.
To address this issue, Tesla must focus on consistent and transparent messaging. This entails providing accurate forecasts on demand, pricing, margins, product development, customer acquisition strategies, and market segmentation. By doing so, Tesla can demonstrate to investors its deep understanding of the realities of the car business.
Moreover, Tesla’s dominating market position as the leader in U.S. battery electric vehicle sales has significantly diminished. In 2020, the company held nearly 80% market share, whereas it finished 2023 with a 55% market share. This shift highlights the need for Tesla to adapt and mature to sustain its prominence in the industry.
While a single bad quarter does not pose an existential threat to Tesla, it serves as an opportunity for reflection. The drop in the company’s stock price post-earnings is not uncommon, as Tesla has experienced similar fluctuations in the past. Over the past decade, Tesla stock has seen a decline after earnings in more than half of the instances, with an average movement of about 8%. It is crucial for investors to understand that Tesla is a volatile stock, prone to significant fluctuations.
In conclusion, Tesla must prioritize effective communication to restore investor confidence. Addressing its messaging challenges will not only benefit the company’s relationship with investors but also underscore its commitment to growth and success in the competitive electric vehicle market.