Few trends have captivated the attention of investors over the past five years quite like the electric-vehicle (EV) revolution. That’s because there are big dollar signs attached to the global growth of EVs. Based on a report released last year by Fortune Business Insights, worldwide EV sales are expected to grow by nearly 18% annually between 2022 and 2030, ultimately reaching close to $1.6 trillion by 2030.

Though a lot of companies are vying for their piece of the ever-growing EV market share pie, it’s Tesla that’s ridden its first-mover advantages to outsize returns.

Image source: Tesla.

The Rise and Stall of Tesla

As of the closing bell on February 22, Tesla was sporting a nearly $629 billion market cap, which is more than the combined value of many of the world’s legacy automakers. It achieved this mark by doing what no other automaker had done for more than a half-century: successfully build a car company from the ground up to mass production. Last year, Tesla produced almost 1.85 million EVs, which was ahead of its own early year guidance of 1.8 million EVs.

Further, Tesla is the only pure-play EV maker that’s generating a recurring profit, based on generally accepted accounting principles (GAAP). Although legacy automakers like General Motors and Ford Motor Company are generating hearty profits from their internal-combustion engine vehicles, they, along with every other pure-play EV manufacturer, have EV segments that are bleeding red.

The more than 12,000% gain Tesla has delivered to shareholders since its 2010 initial public offering (IPO) is also a reflection of the company attempting to become more than just an EV maker. CEO Elon Musk has overseen the placement of nearly 55,000 supercharger connectors and has talked up the potential of Level 5 autonomous driving software, as well as its Optimus humanoid robot, among other innovations.

In other words, Tesla’s stock has been powered by the belief that it’s a premier growth story.

But in my view, this story-book growth tale is officially dead.

The Harsh Reality of Decline

For a moment, let’s put aside specific catalysts and headwinds and focus on a company’s rawest measure of success: its earnings per share (EPS).

Between 2019 and 2022, Tesla’s automotive revenue more than tripled to $71.5 billion, and its adjusted (non-GAAP) EPS catapulted from $0.01 to $4.07. It was every bit the game-changer Wall Street expected it to be, with historically low interest rates and fiscal stimulus during he COVID-19 pandemic assisting its outperformance.

But based on Wall Street’s consensus EPS estimates, the 2022 to 2025 stretch tells a completely different story. After reporting $4.07 in EPS in 2022, the company’s per-share profit declined by 23% in 2023 to $3.12. For context, EPS estimates for 2023 entered the year above $6 per share, which means they were halved over the course of 12 months.

It’s the same story for Tesla’s 2024 and 2025 consensus EPS, which currently sit at $3.05 and $4.06, respectively. Wall Street’s 2024 forecast has come down from a peak of over $7 per share, while the $4.06 expected in 2025 has also been slashed by more than 50% over the past year and change. Although earnings estimates are subject to revision, Wall Street is expecting one of the leading growth stocks over the past decade to go absolutely nowhere ($4.07 EPS in 2022 and $4.06 EPS in 2025) through mid-decade.

To be fair, the entire EV industry has hit its first true speed bump. Higher interest rates have made borrowing money and financing new EVs costlier. Additionally, EV infrastructure still isn’t widespread, which serves as an industrywide deterrent.

But as the world’s most-valuable EV company by market cap, it’s Tesla’s glaring flaws that stand out the most.

Image source: Getty Images.

The Faded Glory of Tesla

Tesla’s problems truly became recognizable last year when the company began aggressively reducing the selling price of its four production models (3, S, X, and Y). While shareholders had been hoping that these price cuts were the result of production efficiencies, Musk made clear during the company’s annual shareholder meeting in May that his company’s pricing strategy is dictated by demand. With Tesla continuing its price-reduction strategy into 2024, it’s a crystal-clear indication that EV demand has waned and inventory levels have risen.

Another problem for Tesla is that its ambitions to become more than just a car company are falling flat. Sales growth from its Energy Generation and Storage segment have fallen off, while gross margin for the company’s Services segment clocked in at less than 3% during the fourth quarter. While Tesla has enjoyed spurts of success (e.g.,

Challenges Amid Success

As Tesla boasts a meteoric rise, propelled by game-changing innovations and the widespread acceptance of its Supercharger network among legacy automakers, it has also encountered significant setbacks. Notable missteps, like the ill-fated acquisition of SolarCity, have tarnished the company’s image.

Questionable Financial Health

The quality of Tesla’s profits and cash flow has raised eyebrows among investors. In the third and fourth quarter of 2023, a substantial portion of its pre-tax income derived from regulatory tax credits sold to other automakers and interest income from existing cash reserves. Such reliance on unsustainable sources clouds the true picture of Tesla’s financial performance.

Unveiling the Truth Behind the Numbers

When scrutinizing Tesla’s free cash flow (FCF), it becomes evident that the company’s $2.06 billion in 2023 FCF significantly hinges on excluding $1.81 billion in stock-based compensation. If interest income and regulatory tax credits faced full taxation, Tesla’s FCF would dwindle substantially.

Elon Musk’s Role in the Decline

CEO Elon Musk, often hailed as an entrepreneurial maverick, has not been immune to criticism. Musk’s encounters with securities regulators, coupled with his unfulfilled promises of groundbreaking innovations, have contributed to a loss of faith among investors. Failed ventures, such as the prolonged wait for Level 5 full self-driving technology, have eroded confidence in Musk’s visionary leadership.

Redefining Valuations and Expectations

Despite Tesla’s lofty valuation of 65 times forward-year EPS, signaling a revolutionary era in automotive history, the reality paints a different picture. Tesla’s status as a profitable yet cyclical car company trading at ten times the forward earnings multiple of industry stalwarts like GM and Ford underscores the need for a reevaluation of market perceptions.

The Denouement of Tesla’s Growth Narrative

As the curtain falls on Tesla’s once-soaring growth trajectory, investors are left to ponder the cautionary tale of missteps, inflated valuations, and unmet promises. The allure of Tesla’s past glory now stands at a crossroads, prompting a reevaluation of its long-term viability in an ever-evolving market landscape.