Since my previous analysis of Tesla, Inc. (TSLA) in November, the company’s share price has decreased by approximately 19% and even further year-to-date. This decline is not surprising considering the various factors working against Tesla during this period. One of the main concerns was the labor troubles in Sweden, which had the potential to impact operations in Europe and the US. Additionally, price wars among electric vehicle companies were driving down Tesla’s operating margins. The stock’s price had also significantly increased year-to-date, resulting in inflated market multiples compared to its peers. These challenges suggested limited room for further upside.
However, despite these obstacles, Tesla has managed to navigate through them and come out ahead. It is important to closely examine these developments to determine if the current “Hold” rating on Tesla stock should be reevaluated.
One of the notable issues that arose was the expansion of strike action in Sweden. What initially started as mechanics striking for better collective bargaining agreements spread to other workers’ unions. Unions in countries like Denmark, Norway, and Finland also expressed their support for the Swedish Union, resulting in restrictions on Tesla-related tasks in these areas. This labor disruption poses a significant risk to Tesla’s operations.
On the sales front, Tesla’s popularity remains strong. In its largest Nordic market, Norway, Tesla’s market share increased from 12.2% to 20% in 2023. Despite the labor disputes in Sweden, Tesla has seen an uptick in registrations, aligning with the company’s overall sales growth. While the sales contribution from Nordic countries is relatively small, the potential risks of slowing growth and industrial action spreading to Germany cannot be ignored. Tesla faces the challenge of maintaining its growth trajectory in these key markets.
Macroeconomic factors may offer some relief for Tesla. Sweden’s inflation has significantly decreased, which could ease the cost of living crisis and help alleviate labor pressures. Although the Swedish economy is not projected to experience significant growth, the absence of contraction and lower inflation rates may work in Tesla’s favor. Similarly, the German economy is expected to perform better this year, potentially benefiting Tesla’s operations in the country.
Tesla’s financial numbers indicate some positive developments. Sales have grown steadily, with an increase of 20% year-on-year in Q4 2023, although this growth rate is lower than the full-year growth of 38%. The company’s operating margin improved in Q4 2023, reversing the sequential decline experienced in the previous quarters. However, the operating margin is still lower than that of Q4 2022. Tesla’s GAAP net margin reached a high of 31.5% due to an income tax benefit, while the non-GAAP net margin remained steady at 9.9% compared to Q3 2023. These financial metrics demonstrate both positive and negative trends for Tesla.
Despite these positive developments, Tesla’s market multiples are still relatively high compared to its competitors. Chinese company BYD has surpassed Tesla in terms of vehicle deliveries, signaling increased competition in Tesla’s second-largest market. While it is important to note that Tesla is a global brand, whereas BYD is focused on the Chinese market, the disparity in market multiples raises concerns.
In conclusion, Tesla’s labor challenges persist and are expanding beyond Sweden. The company’s financial performance and sales growth remain strong, but market multiples are still elevated. If Tesla can continue to improve its margins and effectively manage its labor situation, it may present a buying opportunity in the future. However, at present, the “Hold” rating on Tesla shares is warranted, as the company’s narrative is still evolving.
