Tesla (TSLA) has faced challenges in the past. Its stock has dropped over 30% within less than 2 months on as many as eight separate occasions in recent years, erasing billions in market capitalization and negating significant gains in a single correction. If past patterns hold, TSLA stock is not shielded from abrupt and drastic drops.
GRUENHEIDE, GERMANY – JULY 17: A stop sign stands near the Tesla logo at the Tesla factory on July 17, 2023 near Gruenheide, Germany. Tesla will reportedly present its plans tomorrow to expand production at the factory, from thee current level of approximately 250,000 cars per year to one million. The plan calls for the construction of a new assembly hall that will be the size of 60 soccer fields, which is likely to draw opposition from local communities. (Photo by Sean Gallup/Getty Images)
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In particular, we identify the following risks:
- Escalating Price War Resulting in Major Margin Compression
- Decline in Market Share in Critical Growth Area (China)
- Cybertruck/4680 Battery Production Shortfalls
Risk 1: Escalating Price War Resulting in Major Margin Compression
- Details: Automotive gross margins at 4.5-year lows, potential for further EPS estimate reductions following Q4 delivery miss
- Segment Impacted: Automotive Sales, Global
- Potential Timeline: Immediate, Q1 2026
- Evidence: Revenue per vehicle fell roughly 3% year-over-year in Q3 2025 and margins fell to about 14%. With U.S. Federal tax credits now stopped, things could remain challenging.
Risk 2: Decline in Market Share in Critical Growth Area (China)
- Details: Threatens long-term growth narrative and valuation premium, ongoing volume reductions in a vital market
- Segment Impacted: China Automotive Sales
- Potential Timeline: Ongoing, expected to worsen in H1 2026
- Evidence: New CAAM data show Tesla delivered 73,145 vehicles in China in November 2025, slightly below the 73,490 units sold a year earlier. While the roughly 345-unit decline is small, it contrasts with strong growth from rivals like BYD and Xiaomi, underscoring rising competitive pressure in China’s EV market.
Risk 3: Cybertruck/4680 Battery Production Shortfalls
- Details: Inability to realize significant revenue from a crucial new product, writedowns on capital expenditures for 4680 production lines
- Segment Impacted: Automotive Manufacturing and Battery Technology
- Potential Timeline: Immediate to the next 2 quarters
- Evidence: Key supplier L&F Co. wrote down its $2.9 billion cathode supply deal for 4680 batteries by over 99% to merely $7,386, Cybertruck is selling at an estimated annual run rate of 20,000-25,000 units, significantly below the 250,000 unit production capacity
What Is The Worst That Could Happen?
Examining Tesla’s risk during tough periods reveals significant downturns. It plummeted approximately 54% in the 2018 correction, 61% during the Covid crash, and 74% in the inflation surge. Despite Tesla’s growth narrative, these declines underscore how volatile it can be when markets shift downward.
However, stocks can decline even when the markets are performing well – consider events like earnings reports, business updates, and outlook adjustments. Read TSLA Dip Buyer Analyses to understand how the stock has bounced back from sharp declines previously.
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Is Risk Showing Up In Financials Yet?
- Revenue Growth: -1.6% LTM and 9.3% last 3-year average.
- Cash Generation: Almost 7.1% free cash flow margin and 5.1% operating margin LTM.
- Valuation: Tesla stock is trading at a P/E ratio of 278.0
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For additional details, read Buy or Sell TSLA Stock.
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