Tesla Shares Tumble as Fears Over Weakening EV Demand Soar

Cyclical storms have been brewing around Tesla Inc., contributing to a substantial share price drop of nearly one fifth in less than two weeks. The sharp downturn reflects mounting apprehension over the flagging demand for electric vehicles (EVs).

Tesla's shares began their downward spiral earlier this month, driven by a lowering of growth outlook during the third-quarter earnings call. Evidently, this setback did not go unnoticed, with various global automakers and Wall Street analysts adding to the negative commentary.

Further dark clouds loomed large over Tesla, when battery maker Panasonic Holdings Corp. and chipmaker ON Semiconductor Corp. added their voices to the alarm bells ringing through the EV industry. The reverberations of these warnings have pounded the stocks across the U.S. automotive sector, which is already locked in extensive negotiations with labour unions over wages.

Nevertheless, the slide in Tesla's value has been phenomenal. Its shares have plunged around 20% since the October 18 report, marking a stark contrast to a 3.6% drop in the S&P 500 Index, and a decline exceeding 4% in the Nasdaq 100. This steep fall has wiped an approximate $145 billion from the company's market capitalisation.

The core of the issue, as outlined by Morgan Stanley analyst Adam Jonas, lies in a capital-intensive sector investing heavily in still unproven EV strategies in a world characterised by rising costs, lower prices, high-interest rates and a weakening demand.

Furthermore, the awaited returns on the substantial investments could potentially be value destroying, rather than value adding, leading to considerable consternation amongst investors.

Increased interest rates have driven up car owning costs, resulting in a gloomier outlook for the auto industry as a whole. Add to this the challenge of inflation, the propensity for consumers making large purchases wanes, hitting EVs – a relatively novel technology with a developing charging ecosystem – the hardest.

Given these factors, Tesla, being an EV pureplay with a staggering valuation, has the most at stake. While the heft of its premium share price reflects its potential to devise self-driving cars, a major part of it hinges on the company's ability to sustain its current dominant position in the EV industry and its profit margins.

When EV demand shrinks, and Tesla's aggressive price cuts seemingly lose their ability to further enhance demand, anxiety among investors increases, mirrored in the sharp deterioration in share price.