Is Tesla stock set for a massive correction?

Tesla stock’s dipped, and it’s the worst performing of the Magnificent Seven. So with the hyper-growth phase over, will it tank?

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Tesla (NASDAQ:TSLA) stock stunned investors for all the wrong reason on 2 April. The Elon Musk company underperformed in Q1, delivering 386,810 electric vehicles (EVs) and producing 433,371.

Deliveries were down both sequentially and year on year. So it appears the hyper-growth phase is now over. What does this mean for Tesla and what does it mean for shareholders? Let’s explore.

A new strategy

While slowing vehicle deliveries are a cause for concern, falling margins have also been an issue. It’s no secret that Tesla has been trying to put pressure on market newcomers in the form of lowering prices in an effort to protect market share.

The big issue has been the company’s margins. In the fourth quarter, Tesla reported it total GAAP gross margin fell from 23.8% a year ago to 17.6%. This represents a negative 612-basis-point change.

It also appears to be the case that Tesla’s low-cost strategy isn’t working. It’s no longer the world’s biggest EV producer having been overtaken by BYD. While BYD isn’t that big outside of China, and Tesla does have a commanding position in developed markets in North America and Europe, Musk’s company has lost its dominance.

Perhaps, understandably, there’s plenty of speculation as to what Tesla will do next. There’s been suggestions it will scrap plans for less expensive models, but Musk claimed these reports were false. However, in the near term, Tesla has plenty of stock it wants to shift. Prices may fall before the company refocuses on building margins.

Autonomy

In early April, Musk also announced it would be unveiling its long-awaited Robotaxi on 8 August. The announcement actually resulted in the shares surging more than 5%. And I’m certainly intrigued as to how this will play out.

Tesla first announced plans for autonomous vehicles in 2019. And plans for a self-driving taxi fleet sound like a winner for margins. However, everything I’ve read suggests we’re at least a decade away from letting robots realistically do all the driving. Maybe these Robotaxis will only ferry people around urban areas at 10mph… I’m not sure.

In the long run, of course, I appreciate that a fleet of autonomous taxis could be a huge business.

The bottom line

Tesla stock still trades at crazy multiples despite the share price falling 33.6% year-to-date. It’s currently trading at 58.7 times forward earnings and 52.5 times earnings from the previous 12 months.

Mercifully, this forward price-to-earnings ratio is expected to fall to 40.6 times in 2025, 34.4 times in 2026, and 27.8 times in 2027. However, this is extraordinarily expensive for a car manufacturer. It’s even pricey for a tech company.

The best indication that this stock is overvalued in the price-to-earnings-to-growth ratio. It’s currently 5.6. Remember fair value is normally indicated by the number one.

Musk’s Robotaxi announcement could keep the share price elevated. Investors want it succeed and the South African is good salesman. But the fundamental data suggests this stock is due a huge correction.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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