What's Up With Tesla?
Tesla’s stock is currently being sold off at an unprecedented rate. In just the last week, the stock has fallen close to 10% and it’s down 60% year-to-date. What’s going on?
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Tesla’s stock is currently being sold off at an unprecedented rate. In just the last week, the stock has fallen close to 10% and it’s down 60% year-to-date. In comparison, the S&P500 is up 2% in the past week and down 15% year-to-date.
What’s going on?
Some posit that Elon Musk’s Twitter escapades is tarnishing his brand (which is tightly coupled to Tesla’s) and causing investors to question whether he’s too distracted to be able to keep the Tesla ship afloat and on-course.
Another thesis is that the current sell-off is a fundamental one.
More specifically, the thesis is that Tesla is a company built on a shaky foundation where its substance doesn’t live up to a grandiose image propped up by a salesman. With Musk distracted by Twitter and other automakers rapidly catching up, this foundation is cracking.
Here are some reasons why.
Weak Demand: Gordon Johnson, founder and CEO of GLJ Research, recently pointed out on CNBC that Tesla is currently experiencing serious demand headwinds. If true, this is the first time the company is facing weak demand in its history.
Inventory is piling up in China, Europe, and the US.
The company has had to introduce price cuts this quarter to maintain sales volume.
Lead times for car deliveries have dropped to one week vs several months earlier this year and the EU backlog will be completely gone by the end of this quarter.
Factories are operating at below capacity. Two factories are operating at 20% capacity and there are reports that Tesla needs to cut capacity in its Shanghai factory later this quarter.
While demand stalls, Tesla is also facing serious competition in all of its biggest markets.
In China, BYD is significantly outselling Tesla in EVs (sold 229,942 EVs in November vs Tesla’s 100,291 EVs). BYD holds 28% of China’s EV market while Tesla holds 7%.
Tesla’s Europe EV market share fell from 20% in 2019 to just 5% in Q2, even as it opened a new factory in Germany in March. In addition Europe’s incumbent automaker, Volkswagen, has earmarked $180 billion for investment into EVs in the next decade.
Tesla’s US EV market share has been falling rapidly, from 79% in 2020 to 64% this year. S&P Global Mobility predicts this to drop to 20% by 2025.
Tesla has an inability to launch new car models. The company only has four car models for sale and the next addition to its lineup, the Cybertruck, has been delayed for several years. While Tesla stalls, the competition is rapidly launching new EV car models. GM, for example, has already announced 7 new EVs that will launch in the next two years with many more to come.
Product Quality Problem?
Consumer Reports ranked Tesla 19th out of 24 top car brands in its 2022 reliability report.
British consumer outfit ranked Tesla cars as the “least reliable cars in history”.
Immaterial Auxiliary Businesses
Tesla is often touted as not only a car company, but also an energy and a technology company. However, its energy division still only accounts for 5% of the company’s revenue and continues to be a loss leader. Tesla’s self-driving car technology is under criminal investigation by the US Department of Justice following more than a dozen crashes last year.
While Tesla’s self-driving car technology is facing a criminal probe, GM’s Cruise is already operating a paid full self-driving taxi service in San Francisco with plans to rapidly scale the service across the US.
It’s too early to tell where the Tesla Optimus Robot stands as a product/business.
This is well understood and not much needs to be said here, Tesla’s stock is overpriced by many common measures. For example, the company is more valuable than the next 4 largest automakers combined but only sells 4% of the cars they do.
Don’t Short Tesla
As tough as the situation looks for Tesla, we still think that shorting Tesla continues to be a risky idea. Even though the stock has performed disastrously this year, recent history is littered with short sellers that have tried and failed to bet against Tesla/Musk and it continues to have the potential to surprise both ways.
A better alternative to betting against Tesla is to invest in its most promising EV competitors.