Tesla Inc (NASDAQ:TSLA) stock is down more than 10% in spite of 53% growth in delivery numbers.
A week back the electric car manufacturer, Tesla Inc (NASDAQ:TSLA) announced the date and timeline of production for its highly anticipated mass market "Model 3" sedan. The company followed up with delivering the first Model 3 on Friday, as announced. However, the market reaction was not what many had expected. While Tesla stock did go up after the Model 3 announcement, delivery numbers played spoilsport and the analysts' commentary which followed didn't help the stock either. Tesla stock is down almost 19% since it hit an all-time high on June 23rd and is no more the most valuable carmaker in the United States. It has lost around $12 billion in market cap in the last couple of weeks. Tesla stock has currently found support from its 100-day moving average line.
What caused the correction?
Tesla stock was correcting even before analysts' commentary came in. The stock was down more than 5% from its peak before the announcement of the delivery numbers were made. The initial correction was mainly driven by high valuation and profit booking. Tesla stock had rallied around 80% from the beginning of the year when it hit the all time high towards June end, without much support from the fundamentals. The stock was mainly driven by hope and speculation. After such a strong rally it was natural that some investors would book profits. The rally had also led to an expansion in Tesla's already expensive valuation multiples, which increased the concern around the stock.
The delivery numbers were not bad per se. In fact, Tesla delivered 22,000 vehicles in Q2 2017, good enough for 53% YoY growth. However, the 53% growth was lower than what the company had delivered in the first quarter. Further, the total production of 25,705 was not a significant improvement from the first quarter. Given Tesla's expensive valuation, it needs to continue delivering strong growth numbers. Tesla stock is currently trading at a PS ratio of 6.02, while GM stock trades at PS ratio of 0.31x. Even Ferrari (NYSE:RACE), which has very strong margins, trades at a PS of 4.37x.
But more than the delivery numbers, it was analysts' commentary which followed that spooked the investors. Analysts at Goldman Sachs and Cowen and Company reaffirmed their sell rating on Tesla stock, cutting its price target. There are two main causes of concern, slowing demand and Model 3 production. Sales of Tesla's Model S luxury sedan appears to have peaked in 2015 Q4. In Q4 2015, Tesla had delivered over 17k Model S sedans. The company has not been able to come near that figure again in the following quarters. In the most recent quarter, Tesla delivered 12,000 Model S sedans, a far cry from its peak. There is also concern that Model X sales are starting to stagnate. And according to a report by InsideEvs, Tesla's deliveries in the U.S actually fell 5% y/y to a total of 9,740.
Competition continues to intensify.
There is also worry that increased competition, both from other companies as well Model 3 will further hurt the sales numbers. Some customers are expecting Model 3 to be a better version of Model S, a misconception which Tesla and its CEO, Elon Musk have been trying to clear for more than a few months. If Model 3 manages to cannibalize Model S sales, it will hurt the company's bottom line as Model S is more profitable of the two.
The competition from other companies is also intensifying. Volvo recently announced that it will be joining the electric car race. The company intends to start phasing out purely gasoline- and diesel-powered cars, starting from 2019, in favor of electric models. Volkswagen has also announced its big electric car dreams. The company even went on to claim that it can stop Tesla. Other carmakers such as Jaguar and Toyota are also intensifying their efforts.
Withdrawal of tax incentives is likely to slow down sales growth.
Further, there are reports of states withdrawing incentives for electric cars and slapping new fees to pay for infrastructure. This is not good for the industry. The electric car industry relies on tax incentives to lure customers. Withdrawal of tax incentives have led to a fall in demand across the globe. Last year, an attempt to phase out tax breaks in Denmark had resulted in a 71% drop in battery-powered vehicle sales according to the International Energy Agency. In the Netherlands, a cut in tax breaks on hybrids caused hybrid car sales to plummet by 50%.
To make the story even worse for Tesla, Wall Street Journal reported that Tesla sales have come to a screeching halt in Hong Kong. "Not a single newly purchased Tesla model was registered in Hong Kong in April, according to official data from the city’s Transportation Department analyzed by The Wall Street Journal" the report stated. Hong Kong had phased out tax incentive before April 1. To be fair to Tesla though, many customers had rushed to purchase their cars before the April 1 deadline. In March, 2,939 Tesla vehicles were registered there—almost twice as many as in the last six months of 2016. But this still shows the heavy reliance of Tesla on tax incentives.
Tesla Inc will continue to grow.
While the slowdown in car sales, intensifying competition and withdrawal of tax brakes are indeed a cause for concern, it's not all gloom and doom. The EV sales in the United States, as well as world over, will continue to grow at a rapid pace, faster than many have expected. This will benefit Tesla too. Tesla still has headroom to grow, especially with its Model 3 cars. However, the question is, can Tesla grow fast enough and make enough profit to support its current valuation? To put it mildly, it is going to be a difficult task.
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