Tesla is risking something it hasn't done since the launch of the Model S, and it could trigger a big move in its stock. The Motley Fool

Tesla (TSLA 3.91%) One of the world's largest makers of electric vehicles (EVs), but its stock has fallen 39% from an all-time high set in 2021, and it continues to underperform. S&P 500 Index this year.

Tesla EVs are facing several challenges related to demand, competition and rapid sales growth. In fact, the company may deliver EVs annually shrink It started production of its flagship Model S in 2011 for the first time in 2024.

Tesla's stock still looks extremely expensive despite the downside from 2021. Here's why the annual decline in EV sales could be a trigger for worse.

Tesla is having a tough year

Tesla's total EV deliveries in the first half of 2024 fell 6.5% from the same period last year, and the company announced its third-quarter deliveries, which fell short of Wall Street expectations. These results look even worse when you consider that Tesla has cut its prices over the past year to boost demand.

The price cuts have led to a steady decline in Tesla's gross profit margins, which are now in half from their peak three years ago. In other words, low prices failed to ignite the company's sales growth. And They have significantly dented the company's profits.

But those challenges aren't unique to Tesla. EV sales in Europe fell 44% overall in August, with their market share falling to just 14% from 21% in the same month last year. Also, car manufacturers prefer General Motors And Ford Motor Company It has cut billions of dollars in planned investments in its EV segment, citing soft demand.

Tough economic conditions headlined by high interest rates are pushing consumers toward cheaper gas-powered cars instead.

But the competition is another big headwind for Tesla. Manufacturers based in countries with lower production costs — such as China BYD — churning out EVs at price points that Tesla simply can't compete with. The BYD Seagull, for example, sells for under $10,000 in China and is likely to enter Europe in 2025.

Tesla has a big presence in both China and Europe, so it's feeling the pressure. That's why the company plans to launch a low-cost EV of its own next year that could cost as little as $25,000. It probably won't be enough to displace Seagull, but it could entice lower-income customers who want a more premium product.

Tesla's deliveries are at risk of annual declines

Tesla began production for its flagship Model S in 2011, and delivered it to 2,600 customers in 2012. Thanks to the company's expanding fleet, which now includes the Model 3, Model Y, Model X and Cybertruck, its deliveries have increased each year since.

In 2023, Tesla delivered a record 1,808,581 vehicles, a 38% increase from 2022. While that was a strong result, that growth rate was significantly slower than CEO Elon Musk's target of 50% annual growth.

Also, due to the recent challenges I highlighted earlier, Musk did not provide a forecast for 2024, which some analysts predict could be around 2.2 million deliveries. That represents just a 22% increase over 2023, which would be well below Musk's 50% target — but there are bigger problems.

Tesla delivered just 1,293,656 vehicles in the first three quarters of this year, meaning it would need to deliver a record 514,925 vehicles in the final quarter to beat last year's numbers. Failing to do so, deliveries will shrink on an annual basis for the first time since the introduction of the Model S.

Tesla stock looks extremely expensive right now

Based on Tesla's trailing-12-month earnings per share (EPS) of $3.56, and its stock price of $249.27 as of this writing, it trades at a price-to-earnings (P/E) ratio of 70. It's more than that twice Its 32.1 P/E ratio Nasdaq-100 Technology Index, which is representative of Tesla's large-technology peers.

This makes Tesla more expensive Nvidiawhich trades at a P/E ratio of 55.7. Here's the big problem: Nvidia is on track to grow its EPS by 138% in its current fiscal year, compared to Tesla's EPS forecast. shrink In calendar 2024. From that perspective, it makes absolutely no sense for Tesla stock to command such a premium to the rest of the tech sector.

Many investors own Tesla stock for its future prospects outside of the EV industry. The company is a leading developer of self-driving software, humanoid robots and solar power generation and battery storage. These divisions could be extremely valuable in the future, but Tesla's EV sales today account for 78% of its total revenue, so investors can't ignore what's happening in its core business.

Tesla stock would need to decline 54% from current prices just to bring its P/E ratio into line with the Nasdaq-100, meaning investors who buy it at current prices are potentially opening themselves up to a significant correction if sentiment takes a negative turn. Declining annual EV deliveries could be the trigger, especially if analysts don't see any growth on the horizon until 2025.