It hasn't been an easy year for electric vehicle maker Tesla (NASDAQ: TSLA), which has seen its stock fall roughly 30% this year (as of April 30 market close). The company reported disappointing first-quarter results, with deliveries of roughly 337,000 coming in the lowest level seen since 2022.
Many investors and analysts have also suspected that CEO Elon Musk's work with the Department of Government Efficiency (DOGE) has hurt the brand. However, investors got some reprieve during Tesla's first-quarter earnings call, when Musk told investors that his work with DOGE would be scaled back significantly in May, leading many investors to believe he will refocus on Tesla. While this is undoubtedly great news, the company still faces three big challenges.
1. Struggling core EV business
Whether Musk alienated Tesla customers or not with his role at DOGE, there is no doubt that Tesla's core EV business is struggling. In January and February, Tesla's sales in Europe supposedly plummeted nearly 50% year over year, according to the European Automobile Manufacturers' Association. That's despite the organization saying that EV sales in Europe grew 28% during that time.
In China, there were similar headlines of plummeting Tesla sales in the world's second-largest economy. This also occurred as the Chinese EV company and competitor BYD had a big year in 2024, not only taking over 30% market share in China, but surpassing Tesla in annual revenue. The company has rolled out a cheaper EV model and designed a charging system that is more powerful than what Tesla currently offers.
While BYD is unlikely to bring its vehicles to China anytime soon, there is no shortage of competition. Slate Auto, a company partly backed by Jeff Bezos, recently unveiled an electric-powered truck that can also transform into an SUV, with a starting price of $20,000. The vehicle is also made in the U.S.
Following its first-quarter results, Tesla didn't provide any updated guidance regarding its auto business, but said it would revisit guidance in the second quarter. Part of this is likely due to elevated concerns about tariffs, but it could also reflect concerns about growth moving forward.
2. New initiatives
In recent quarters, Musk has been able to get investors to look past struggles in the core EV business by exciting them with new initiatives. One of those is new, lower-cost Tesla models.
On the company's recent earnings call, management said they are on track to begin production on a lower-cost model in June. However, the models will be largely based on previous models and there was no clear announcement on price. Meanwhile, competitors have already launched new, lower-cost models. Lars Moravy, Tesla's VP of vehicle engineering, also added that the launch "... might be a little slower than we had hoped initially," which doesn't exactly scream confidence.
Tesla is also planning to launch a new software system with unsupervised full self-driving (FSD) capabilities. The company is planning a robotaxi launch in Austin, potentially as soon as June. Musk also said on the company's earnings call that FSD capabilities will be available on personal Tesla vehicles before the end of the year. Still, we're at a point where investors really need to see progress, and a disappointing demonstration could really hurt the stock.
Tesla has also excited investors with the prospects of its Optimus robots, which can supposedly complete household chores. But it looks like there is still a long way to go before these robots become commercial and begin contributing to the top line. Musk said:
I just want to emphasize, Optimus is still very much a development program. It's not a large-volume production. That's why this year we will make a few. We do expect to make thousands of Optimus robots, but most of that production is going to be at the end of the year.
Once again, investors are going to be watching progress closely.
3. High valuation
Trading at 147 times forward earnings, Tesla doesn't exactly trade on fundamentals. Given struggles in the core EV business, much of the valuation is based on the genius of Musk and future initiatives such as the lower-cost vehicles, FSD, robotaxis, and Optimus.
But I think Tesla is starting to become a show-me story, especially when you consider the amount of competition creeping up. If these future initiatives mentioned don't live up to the hype or face delays, that's likely going to hit the high valuation and stock price, which factors in the futuristic aspect of Tesla. This, in my opinion, creates an unfavorable risk-reward proposition right now.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends BYD Company. The Motley Fool has a disclosure policy.
