Over the past several weeks, Tesla Inc. (TSLA, Financial) has been both a blessing and a curse for its investors. This stock has generated plenty of buzz from those who are bullish and those who are not so optimistic.
Further, the share price has seen an incredible surge year to date, having risen from around $100 to the $200 mark so far.
Many investors reacted positively to Elon Musk's January production prediction for 2023. The CEO said he anticipates an unprecedented surge in demand for the electric vehicles, which was one of the main reasons why the stock has done so well this year.
With the stock already having a run, investors should think twice when presented with higher-than-expected estimations. It is especially necessary to have second thoughts in light of Tesla's recent recall of more than 350,000 EVs due to safety concerns raised by The National Highway Traffic Safety Administration.
Since autonomous features are essential to Tesla's future income and long-term forecasts, government regulations may hinder its progress and cause the company to focus on existing systems rather than pursue ambitious projects. As such, its near-term vehicle production capacity and market demand remain a concern.
What to make of Tesla's recalls
Tesla has been working on its full self-driving feature for years. Although the technology is already available to 400,000 users who have clocked over 100 million miles of driving, it still has a few glitches.
The NHTSA recently released a recall notice cautioning that the full self-driving package for Tesla cars might lead to risky driving conditions near intersections. Additionally, the system may not accurately detect changes to posted speed limits or the driver's tendency to go above those limits. Thus, according to the agency, it may not react adequately to these scenarios.
As a result, Tesla initiated a recall of 362,758 cars from its Model S, Model X and Model 3 lines. The company decided on a software fix for all the affected cars to tackle this issue.
Bullish investors believe Tesla will once again experience success when it takes the time to refine its FSD technology and brings it to maturity. Additionally, deploying the software business could dramatically enhance its margins.
However, there is a possibility the technology might not succeed. While there are criticisms of the software, people may also just lose interest in it over time. Alternatively, another business could put pressure on the competition.
In an interview last year, Musk emphasized his commitment to resolving the FSD question, saying it was "the difference between Tesla being worth a lot of money or worth basically zero."
Ark Investment's Catherine Wood (Trades, Portfolio) has also predicted that Tesla's stock could rise to as high as $4,600 by 2026 if its autonomous driving technology is successful. This is expected to majorly affect Tesla's future share price growth. Hence, it is vital for the company to get it right.
In the last 12 months, Tesla has recalled over 4 million vehicles, making it the second-most recalled automaker in America. While the recalls have caused frustration for Tesla bulls, almost all of the issues have been fixed through over-the-air software updates. For investors, however, most recalls do not hold much weight. They tend to go unnoticed, and sometimes car buyers are unaware of them until they bring their vehicles in for maintenance at a dealership. In such cases, the recalls are fixed quickly with minimal disruption.
Despite all the recent recalls, Tesla's stock has not given away its gains, which is usually true for other automakers.
However, the issue can become a big one moving forward. Tesla acknowledges the risks posed by warranty costs in its regulatory filings and said there is a risk that current and future warranty reserves may not be enough to cover future claims. The EV giant noted the claims "could adversely affect our financial performance."
Questions regarding demand
The impressive performance of Tesla's stock so far this year can be largely attributed to Musk's positive predictions.
Toward the end of 2022, Tesla reduced its prices, which appears to have stirred up an interest in its products. While being cautious, Musk predicted a successful year for the company. Further, if there are not any supply chain disruptions, he said Tesla could manufacture up to 2 million cars in 2023, which could be met with an equally large demand.
However, concerns remain in regard to production at its Shanghai factory as the company's plans to expand the facility have been put on hold.
The Shanghai facility has the greatest production capacity of any Tesla plant and has been closely observed by interested parties. With China playing such an enormous role in Tesla's present and future development, this heightened attention is understandable. For now, the decision to halt extension plans has ignited many questions related to the demand for Tesla's EVs in China.
Even though Musk has given encouraging remarks since the start of the year, it is understandable that demand surpassed production, considering the Shanghai facility was closed in January due to Lunar New Year.
Competition from other major Chinese players also remains a concern. In January, BYD Co. Ltd. (BYDDY, Financial) continued its streak as China's most popular EV brand. To start the year, it sold 71,338 cars, making it the top seller of pure EVs in China for 10 consecutive months.
Meanwhile, Tesla shipped approximately 39,000 vehicles manufactured in China during January. This resulted in a total domestic sale of roughly 27,000 units, which is a decrease of 35% compared to December 2022.
Even on a global scale, things look tough. According to BloombergNEF, EV adoption is estimated to grow steadily in 2023, though not as rapidly as between 2020 and 2022, when sales skyrocketed from 3.2 million to over 10 million units.
In addition, the strategic research provider noted that sales of plug-in vehicles currently account for 15% of the global car market, meaning their success is now linked to a volatile world economy. Although the Federal Reserve believes it is making some headway when battling inflation, the war is far from over since the rate remains above the 2% target. Before this is achieved, markets can expect more interest rate hikes, which is not great for the U.S. economy and, in turn, the global economy,
Takeaway
Tesla is paving the way for electric vehicles and has gained immense customer trust. As a result, it has earned a strong position in the EV market and achieved impressive sales records over the years.
Since the start of the year, investors have been buoyed by the enthusiasm for Tesla’s outlook and the economy's brightening as inflation cools down.
Despite this, it is prudent to remember the company has several short-term obstacles that could substantially impact its financial performance.
Tesla has made headlines for quite some time due to its FSD technology, a major financial boost for the company. However, the recent product recall has strained its long-term prospects and raised concerns among investors as well as consumers.
Furthermore, possible softening of demand in China is another pressure point for the EV giant.
When you add in the runaway growth shares have achieved so far this year, Tesla does not look like a bargain.
