Tesla's Stock Rebounds Despite Declining Sales and Earnings

Tesla's stock surged over 13% in after-hours trading despite the company reporting a 9% decrease in revenue to $21.3 billion and a 55% drop in net income to $1.12 billion in its first-quarter earnings report. The electric vehicle maker's automotive revenue saw a 13% decline from the previous year, totaling $17.4 billion, and its gross profit margin decreased from 19.3% to 17.4% compared to a year ago.

Why this matters: The decline of Tesla'ssales and earnings has significant implications for the electric vehicle industry as a whole, as well as the broader economy. As a pioneer in the electric vehicle market, Tesla's struggles could have a ripple effect on other companies and industries, potentially impacting job growth and innovation.

Two significant catalysts contributed to the stock's rebound. First, Tesla announced an accelerated timeline for releasing new, more affordable vehicles, which will utilize existing manufacturing lines, avoiding the need for costly new infrastructure. Second, CEO Elon Musk's surprise visit to Beijing resulted in agreements with Chinese officials and tech giant Baidu, facilitating the potential rollout of Full Self-Driving (FSD) technology in China.

Ahead of its earnings, Tesla's sentiment was the lowest it's been in months, with a consensus rating downgraded from hold to reduce. However, following the earnings results, the stock's consensus rating improved from reduce to hold, based on thirty-three analyst ratings. The consensus price target has been reduced month over month, from $202 to $185.90, forecasting just 3.27% upside.

Recent analyst actions include Evercore ISI lowering its target for Tesla from $155 to $145, forecasting over 22% downside, while Wedbush reiterated its rating as outperform, with a $275 price target. Cantor Fitzgerald initiated coverage of Tesla with an overweight rating and target of $230, predicting almost 30% upside.

Despite the recent stock surge, Tesla faces underlying issues with growth and margins. The company's biggest problems have yet to go away, including softening demand in the U.S. and China and lower margins. As David Mazza, CEO at Roundhill Investments, noted, "When your core business is declining, that narrative is a lot harder, which is why I think the multiple right now is detached from reality and the stock is not cheap despite coming down a lot this year."

Tesla's market capitalization of $574 billion is becoming detached from its core EV operations, with less than half of its value based on the auto business. Competition is heating up in the self-driving space, with companies like General Motors, Ford, and Volkswagen investing heavily in the technology. As Toni Sacconaghi, analyst at Sanford C. Bernstein, cautioned, "Fully self-driving may not be a winner-take-all market, and if it is, it is not clear that Tesla will win."

Tesla's recent stock rebound seems to be losing momentum as the company grapples with declining sales and earnings. While promising developments like new affordable vehicles and potential FSD rollout in China provided a temporary boost, the underlying issues of softening demand and lower margins persist. As Tesla's valuation becomes increasingly detached from its core business, investors should approach the stock with caution.

Key Takeaways

• Tesla's Q1 revenue drops 9% to $21.3 billion, net income falls 55% to $1.12 billion.
• Stock surges 13% despite poor earnings due to new vehicle plans and China FSD deal.
• Tesla's automotive revenue declines 13%, gross profit margin drops to 17.4%.
• Analysts remain cautious, citing softening demand and lower margins.
• Tesla's valuation becomes detached from core EV business, sparking investor concerns.