Investors are reassessing the premise that justified Tesla’s astronomical stock price and made its founder, Elon Musk, the richest person in the world.
Tesla’s $1 trillion valuation made sense only if investors believed the electric car company was on a path to dominate the auto industry the way Apple rules smartphones or Amazon commands online retailing.
But Tesla’s shares have declined more than 40 percent since April 4 — a much steeper fall than the broad market, vaporizing more than $400 billion in stock market value. And the tumble has called attention to the risks that the company faces. These include increasing competition, a dearth of new products, lawsuits accusing the company of racial discrimination and significant production problems at Tesla’s factory in Shanghai, which it uses to supply Asia and Europe.
Mr. Musk has not helped the stock price by turning his bid to buy Twitter into a financial soap opera. His antics have reinforced the perception that Tesla lacks an independent board of directors that could stop him from doing things that might damage the company’s business and brand.
“From a corporate good governance perspective Tesla has a lot of red flags,” said Andrew Poreda, a senior analyst who specializes in socially responsible investing at Sage Advisory Services, an investment firm in Austin, Texas. “There are almost no checks and balances.”
Even longtime Tesla optimizers are having doubts. Daniel Ives, an analyst at Wedbush Securities, has been one of the most steadfast believers in Tesla on Wall Street. But on Thursday, Wedbush lowered its target price for Tesla — the firm’s estimate of the shares’ fair market value based on future earnings — to $1,000 from $1,400. Mr. Ives cited Tesla’s problems in China, where lockdowns have throttled the supply of crucial parts and materials and demand for cars.
“There’s a new reality for Tesla in China, and the market is reassessing the risks,” Mr. Ives said.
Production problems in China have undercut one of the rationales for making Tesla the world’s most valuable car company. Tesla vehicles have been a hit with Chinese buyers, fueling hopes of supercharged growth in the world’s largest car market. Tesla’s market share in China topped 2.5 percent in the first quarter of 2022, closing in on luxury carmakers Mercedes-Benz, BMW and Audi.
But supply chain headaches in China are compounded by flagging consumer demand, said Michael Dunne, chief executive of ZoZoGo, which advises companies on the electric car market.
Chinese consumers “are edgy, they’re worried about the future,” Mr. Dunne said. “It’s a double whammy that Tesla confronts in China.”
Tesla shares are reacting in part to the same forces that are roiling stock markets around the world: war in Ukraine, rising interest rates, the threat of recession, supply chain chaos and surging inflation. But Tesla shares have fallen much more than other Silicon Valley giants like Apple or Alphabet, the company that owns Google.
Tesla accounted for three-quarters of the electric cars sold in the United States last year. The company is several years ahead of competitors in battery technology and software. But two models — the Model 3 sedan and Model Y sport utility vehicle — accounted for 95 percent of Tesla’s sales. Its next consumer vehicle, a pickup truck, has been delayed many times and is not expected until next year at the earliest.
It’s an axiom in the car industry that new models fuel sales. And competition from the likes of Hyundai, Ford and Volkswagen is growing, offering drivers many more choices.
Jesse Toprak, an auto industry veteran who is chief analyst at Autonomy, a company that offers electric cars by subscription, said that Tesla’s market share will fall below 40 percent by the end of 2023, though its sales will continue to grow as the overall market expands.
“They will have a smaller share of a larger pot,” Mr. Toprak said. “But their near-monopoly on EV sales in the US will slowly diminish.”
Tesla already faces tough competition in Europe, where electric vehicles account for 13 percent of new car sales. That foreshadows what could happen in the United States, where sales of battery-powered cars are just beginning to take off. Volkswagen, which has invested heavily in electric vehicles, sold 56,000 battery-powered cars in Western Europe during the first three months of the year, just behind Tesla, which sold 58,000, according to figures compiled by Schmidt Automotive Research in Berlin.
Tesla’s ability to serve the European market will improve as a new factory near Berlin ramps up production. In the United States and elsewhere, the company has benefited from fanatically loyal buyers who regard Mr. Musk as a visionary and are willing to wait months or years for the company’s cars.
But as electric cars gain popularity because of skyrocketing gasoline prices, the next wave of customers may not be as tolerant or as enamored of Mr. Musk. “The next generation of buyers will be average Joes who are buying EVs because it makes financial sense to them,” Mr. Toprak said. “The brand image of Tesla will be less helpful.”
Tesla’s image is under pressure in ways that could hurt the automaker among the environmentally conscious, politically liberal customers who have long been its biggest customer base. The California Department of Fair Employment and Housing is suing Tesla, accusing it of allowing racial discrimination and harassment to flourish at its factory in Fremont, Calif., near San Francisco. Tesla is contesting the lawsuit.
In another blow, the S&P 500 ESG Index, a listing of companies that meet certain environmental, social and governance standards, ejected Tesla last month. S&P said it was disturbed by claims of racial discrimination and poor working conditions at the company’s Fremont factory.
Mr. Musk responded to S&P’s decision by writing on Twitter that the movement to apply environmental, social and governance standards to corporations a “scam” that “has been weaponized by phony social justice warriors.”
Mr. Musk followed that Twitter post by declaring that he was switching his allegiance from the Democratic Party, which he said had “become the party of division & hate,” and would now vote for Republicans. Politically charged statements like those are certain to alienate some car buyers.
“The more political he becomes, the more that might start to influence buyers,” said Carla Bailo, chief executive of the Center for Automotive Research in Ann Arbor, Mich.
Mr. Musk and Tesla did not respond to requests for comment.
Management turnover is another risk. Mr. Musk is a notoriously demanding boss who has warned Twitter employees that “work ethic expectations would be extreme” if he takes over the social media platform.
The churn at Tesla is obvious. Many of its former senior managers are prominent in the start-up scene in the San Francisco Bay Area. Examples include Celina Mikolajczak, head of manufacturing at fledgling battery maker QuantumScape, who previously helped develop batteries at Tesla, and Gene Berdichevsky, another former Tesla battery developer who is chief executive of Sila Nanotechnologies. Sila announced this week that it would supply materials for advanced batteries to Mercedes-Benz.
Lucid, maker of the only electric model to beat Tesla in the Environmental Protection Agency’s tests of how far an electric car can go on a full charge, was founded by Peter Rawlinson, a former top Tesla engineer until he fell out with Mr. Musk. Lucid’s headquarters is in Newark, Calif., a short drive from Tesla’s Fremont factory.
Mr. Musk’s admirers say he has helped promote emission-free vehicles by seeding the industry with talent. But critics see a risk that Tesla will never develop a stable echelon of experienced managers who can run the company if anything ever happens to Mr. Musk.
“You can’t treat your workers poorly in a tight labor market like we have,” said Mr. Poreda of Sage Advisory. “One bright man can’t make his vision into reality without a lot of really smart people.”
Amid this litany of problems and risks, Mr. Musk has been spending time on acquiring Twitter, though he lately seems to be having second thoughts about the deal. The foray into social media has some investors wondering why the boss is spending so much time writing missives on Twitter while the world burns.
“There is just a feeling,” said Mr. Ives of Wedbush, “that the pilot on the plane is watching some Netflix show while you’re going through a massive thunderstorm.”