Tesla Inc (NASDAQ:TSLA) has endured a difficult month. TSLA stock has fallen as much as 22% off its recent highs, and the media has rushed to amplify numerous bits of negative gossip surrounding the company.
Some of the wounds are self-inflicted. For example, reporters quoted Elon Musk as saying that Tesla stock is “higher than we have any right to deserve.” He later clarified the comment, but by then, traders had already caused a significant decline in Tesla shares.
Tesla stock has also suffered from several other negative catalysts in recent weeks. Among them, Barclay’s reasserted its profound bearishness on TSLA stock. Observers blamed flaws in Tesla’s self-driving technology for a crash in Minnesota.
Additionally, a Q2 update raised doubts about consumer demand levels for the Model S and Model X. And, most recently, SolarCity co-founder Peter Rive announced that he is leaving Tesla. Investors reacted with concern, given the near-term roll-out of solar roofing tiles that are set to go into production shortly.
How Bad Is the News? Some of it Is Innocuous
As it is often the case, when a popular company hits bumps in the road, both the bears and the media love to pile on. Every Tesla negative occurring in July is seemingly getting tons of airplay. That said, what of the bad news matters, and what doesn’t?
I’d suggest that the Minnesota crash is not relevant and can be largely ignored. The driver claims that the vehicle’s self-driving function wasn’t engaged at the time of the crash. Even if the software caused the wreck, there will be errors with new technology. Given the number of human-caused vehicular crashes every year, one accident is hardly a reason to put the brakes on the automated technology.
Rive’s decision to leave Tesla does raise questions. However, ultimately, the future of Tesla is in cars, not solar panels. Many observers view Tesla’s decision to take over SolarCity as a bailout of a failing company. As long as Musk’s side project doesn’t burn through too much capital, it shouldn’t greatly alter the TSLA investment thesis.
If you’re long Tesla stock, you’ve bought a ticket to Musk’s vision of the future. Like any pioneer, not everything he does will succeed. Solar roofs are small potatoes compared to the overall picture.
Subsidy Issues Starting to Sap Demand
The alleged lack of interest in Tesla’s cars is a much more pressing issue. In 2015, EV sales declined nationally. In 2016, sales rebounded, but largely due to just one state. That year, more than half of the country’s EV purchases came from California. This is largely due to California’s aggressive subsidies for electric vehicles as part of its nation-leading effort to deploy 1.5 million zero-emission vehicles on the road by 2025.
However, this has come at a high cost. California is already subsidizing new EVs to the tune of $5,000 each and has proposed raising this to $7,500 per vehicle. But, given California’s massive budget deficit, and the fact that EVs are cutting into the state’s gasoline tax revenue, it’s hard to see the current exceedingly generous subsidies carrying on indefinitely.
In Georgia, the state government eliminated its $5,000-per-vehicle subsidy in 2015. EVs plunged from 3% to less than 0.5% of the market afterward. Earlier this year, in Denmark, EV sales plummeted 60% after the government stopped giving EV imports a preferential tax rate. In Hong Kong, the Wall Street Journal reported an even more shocking decline, with Tesla sales falling from almost 3,000/month to zero after a change in subsidy policy.
This is particularly problematic for Tesla stock now, since the growth case rests on a more mass market vehicle. While Tesla is a luxury brand and may be somewhat insulated from disappearing subsidies in a way the Leaf from Nissan Motor Co Ltd (ADR) (OTCMKTS:NSANY) is not, the Model 3 will be priced at a point where a $5,000 subsidy could make or break the vehicle’s affordability.
Barclay’s Remains Loudly Negative
Barclay’s analyst Brian Johnson remains firmly negative on TSLA stock. Johnson has a price target of just $165 — roughly 50% downside from today’s price. Johnson makes several detailed charges against Tesla’s market position.
For one, he claims Tesla’s proclaimed self-driving lead is more hype than reality. He suggests that Tesla has cobbled together a viable, but unimpressive, combination of pre-existing advanced driver assistance systems. Competitors such as General Motors Company (NYSE:GM) are taking more time to perfect their more sophisticated systems before deploying them to the public. While Tesla may grab headlines for being first, it is also getting some of the wrong sorts of headlines, such as the recent crash in Minnesota.
Johnson also suggests that Tesla’s lead in battery technology is overstated. In fact, he sees competitors catching up with TSLA. Considering the larger automakers’ benefits of scale in other areas, Tesla’s advantage in batteries is more than canceled out.
Additionally, the company’s heavy investments in solar and batteries are hurting its cash position and capital efficiency. He projects that Tesla will spend $20 billion in capex by 2023 and burn more than $7 billion in free cash flow. That could entail several secondary stock offerings that would hit Tesla’s stock price.
Bottom Line on Tesla Stock
TSLA stock has started to recover after a difficult run. The correction appears to be over, at least for the time being. But, real problems are still lingering. Yes, the media is blowing some of the recent headlines out of proportion.
With that said, the issues that Barclay’s points to are significant and should weigh on shareholders’ minds. TSLA defenders suggest the company is the Apple Inc. (NASDAQ:AAPL) of electric vehicles.
However, competition is already more intense, and Tesla’s lead in both self-driving and battery tech seems rather tenuous. Throw in the uncertain impact of diminishing EV subsidies, and TSLA stock could have another leg downward ahead of it.
At the time of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
