Tesla stock has experienced a challenging start to the new year, leaving investors uncertain about what has been driving its decline. However, understanding the reasons behind the significant drop is relatively straightforward.
The wisdom of crowds sheds light on this matter. Analysts' Wall Street earnings estimates are a reflection of all the news and factors impacting a company, including Tesla.
As we approach Wednesday, Tesla stock has already plummeted by 26% compared to a 4% increase in both the S&P 500 and the Nasdaq Composite. This is Tesla's worst start since 2016 when it experienced a similar decline of almost 40% in the same timeframe.
Although the drop this year is steep, it aligns logically with the data. The current consensus call for Tesla's 2024 earnings per share stands at approximately $3.08, according to FactSet. This estimate has decreased by around 20% since the beginning of the year, closely matching the decline in Tesla stock.
In October, just before Tesla stock fell by 9.3% following the company's third-quarter earnings report, Wall Street predicted an earnings estimate of roughly $4.50 per share for 2024. Since then, this estimate has decreased by about 30%, paralleling Tesla's stock decline of approximately 24%.
Analysts don't modify just one estimate individually. Even Wall Street's estimates for Tesla's earnings in 2025 have fallen by roughly 20% since the start of the year. Taking a longer view, these estimates reached a peak of over $8 per share in December 2022 but have now dropped by 50% to $4.23 per share. Consequently, Tesla stock has also fallen by 55% from its all-time closing high of nearly $410 per share, which was reached in November 2021.
Analyzing Stock Moves through Estimate Revisions
As an investor, it is crucial to assess whether stock movements align with company fundamentals. When estimate revisions coincide with these movements, it serves as an indicator of investor concern. However, when revisions and stock moves diverge, it suggests that other factors may be at play.
Discussing Tesla as an example, we recall CEO Elon Musk's announcement on Twitter in April 2022 that he had made a bid for the platform. Following that tweet, Tesla's stock plummeted by approximately 60% throughout the year. Concurrently, Wall Street estimates for 2023 earnings, which play a significant role in trading, increased from about $4.68 to $5.59 per share.
This disparity reveals that Musk's Twitter distraction significantly affected Tesla investors. Nevertheless, as those concerns subsided, Tesla's stock experienced an impressive doubling in value in 2023, despite challenges such as vehicle price cuts and rising interest rates.
It is essential to note that estimate revisions cannot provide a comprehensive understanding of a company's inner workings. Multiple factors contribute to Tesla's decreasing earnings estimates. Firstly, profit margins have been affected by the aforementioned price cuts. Additionally, higher interest rates have intensified the overall cost of purchasing cars for buyers. Moreover, global competition in the electric vehicle market has increased, and Tesla does not anticipate releasing a lower-priced model to expand its addressable market until 2025.
These headwinds present significant challenges for the company. Over 40 analysts have evaluated these obstacles, resulting in lower earnings estimates. Consequently, investors have reacted by driving down the value of Tesla stock.
Ultimately, this dynamic exemplifies the fundamental workings of the stock market.
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