Tesla in Transition: Growth Potential and Challenges in 2024

Tesla's shares witnessed a remarkable 70 percent increase in 2024, propelling the company to a market capitalization of over one trillion dollars. However, this positive development gained real momentum after Donald Trump won the presidential election in November. Tesla's CEO Elon Musk had supported Donald Trump's campaign with his capital and influence. Speculations suggest that Tesla might benefit from potentially looser regulations under the new administration, which could accelerate the introduction of its artificial intelligence-based Full-Self-Driving technology (FSD). Although FSD has the potential to fundamentally transform Tesla's profitability, the company is currently facing a serious short-term challenge. The sales of electric vehicles (EVs) shrank in 2024, marking the first annual decline since the introduction of the Model S in 2011. This development comes at a time when Tesla's shares are deemed expensive, and the current valuation is difficult to justify while the EV business is declining. Last week, Tesla reported its production and delivery figures for the fourth quarter of 2024, announcing the delivery of 495,570 electric vehicles to customers. This result is below the Wall Street consensus forecast, which had expected 504,770 vehicles. Overall, annual deliveries amounted to 1.79 million vehicles, a decrease of 1.1 percent compared to 2023. Although the share price has been driven up by the potential of FSD technology over the past year, EV sales still account for 79 percent of the company's revenue. If this segment does not perform well, it is difficult to justify further rising stock prices. Musk recently predicted a growth in EV deliveries by 20 to 30 percent in 2025, but simultaneously announced the cancellation of the production of a new low-cost model. In recent weeks, contradictory media reports have suggested that Tesla now plans to launch an affordable electric vehicle called Model Q this year, along with a cheaper variant of the popular Model Y. Tesla faces the challenge of increasing its sales growth without the sale of entry-level EVs, as competition from cost-effective manufacturers in countries like China intensifies. For instance, BYD sells an electric vehicle called Seagull in China for less than $10,000 and plans to enter the European market in 2025. As China and Europe are crucial markets for Tesla, and Tesla's cheapest EV is currently around $30,000, the company is not competitive in terms of pricing.