The EV bubble is bursting – and Tesla is taking pain

Tesla’s share price is down 26% in 2024 as the hype around the electric vehicle (EV) market is wearing off and demand is slowing.

Tesla is trading at around $183 per share, down more than 50% from its high of over $400 in November 2021. It is not unique.

Many other electric car companies like Nikola, Fisker, Rivian, and Lucid have lost over 90% of their market caps since their peak.

Investors have clearly lost their taste for these high-risk EV stocks with uncertain futures and tremendous goodwill baked into their prices.

The EV stock price bust is no surprise. Headlines like ‘Rental giant Hertz dumps EVs’ and ‘Audi scales back EV rollout’ have become commonplace as demand dissipates.

The latest financial results of the world’s largest EV maker, Tesla, clearly illustrate that investors have lost their appetite for EV shares.

Between 2019 and 2023, Tesla expanded its production capacity from 365,000 cars to 1.8 million cars. It ramped up its production capabilities to meet the demand.

Historically, nearly all cars Tesla produced were matched with demand. The incredible growth the company achieved caused the share price to skyrocket.

Investors were prepared to pay considerable premiums in anticipation of continued growth. Recently, however, the demand for electric vehicles has slowed.

The growth in the number of vehicles Tesla sold has fallen to the lowest growth rate the company has seen since 2020.

The lower growth rate in the number of vehicles sold raised concerns that the EV market has come to the end of its impressive growth run.

Other EV producers, such as Ford, Toyota, and Volkswagen, have cut their EV productions as their sales outlooks have fallen.

Many analysts expect EV producers to experience muted performance in light of demand weakening.

Tesla cut the price of its vehicles numerous times in 2023. The combination of lagging sales volumes and lower selling prices is affecting its finances.

Tesla’s revenue growth has slowed and experienced a disappointing 3% growth in the most recent quarter. Revenue growth has been experiencing a sudden decline since Q2 2023. 

It is not only sales volumes and revenue which are suffering. Tesla’s profit margins are also under pressure due to lower-than-expected demand.

Elon Musk’s EV juggernaut had to adapt to the new reality by cutting prices to stimulate demand.

The result was that Tesla experienced a decline in net income for three out of the past four quarters.

While triple-digit net income growth was commonplace for Tesla until Q1 2022, this growth has plummeted in recent quarters.

Tesla CEO Elon Musk said in the most recent earnings call that the current interest rate environment has not been favourable for the company.

Higher interest rates have made EVs less affordable. Musk said the company expects higher sales volumes when rates are lowered.

“We have lots of people who want to buy our car, that simply cannot afford it. As interest rates drop, they are able to afford it, and they buy the car,” he said.

Musk explained that “there are no tricks around this”, and Tesla will have to sweat it out until interest rates come down.

It is unlikely that interest rates alone explain the declining demand for electric cars globally.

EVs are indeed still more expensive than combustion vehicles on average. However, it may not be the only factor influencing sales.

Analysts highlighted that the absence of subsidies, high prices, people waiting to see where the technology is going, and poor charging infrastructure are holding back EVs.

2024 will be an interesting year for EVs. It will lift the veil on whether the EV hype was justified or whether the bubble has burst.