It has been an ugly past few months for Tesla (NASDAQ:TSLA). First, the electric-vehicle maker reported weak first-quarter delivery numbers. These figures confirmed waning demand after a surge for the Model 3 in late 2018. Second, Tesla was hit with more legal issues. Third, the company reported ugly first-quarter numbers that missed profit estimates by a mile. Fourth, against the backdrop of the first three developments, Wall Street analysts have been downgrading TSLA stock in bulk.
On a net basis, Tesla stock dropped to $230 in late April 2019. That’s the lowest level shares have traded at in over two years.
Ostensibly, it makes sense why investors are throwing in the towel. Demand is weakening. Profits remain elusive. The company is being forced to raise more capital. Competition is stiffening.
In other words, there’s a lot working against the company right now. But all those headwinds which have dragged TSLA stock to two-year lows will ease dramatically over the next several months. Demand will improve. Profits will come back into the picture. Capital raise issues will move to the sidelines. Competition concerns will be muted.
As all that happens, Tesla stock will bounce back. Consequently, I don’t think now is the time to throw in the towel. On the contrary, I think now may be the time to double down on the long side.
Things Have Been Ugly for Tesla, But Not Fundamentally Ugly
In the big picture, the narrative for TSLA stock has admittedly been weak to start 2019. But this weakness isn’t anything to worry about. Tesla’s core fundamentals remain healthy. Further, ephemeral external factors have largely kept shares down, which will pass with time.
To be clear here, let’s look at the numbers:
- EV sales in the U.S. are up just 10% year-over-year through April, much weaker than expected.
- EV sales globally are up more than 60% through March, which is fairly strong.
- Tesla’s 2019 U.S. deliveries measure around 42,000 vehicles through April, good enough for around 51% market share. This contrasts slightly with 53% market share in 2018.
- Tesla’s global Q1 deliveries were around 63,000 vehicles, which represents roughly 12.7% global-market share, versus 12.2% market share in 2018.
Broadly, Tesla has lost some U.S. market share in 2019 against the backdrop of a U.S. EV market that is off to a slow start. This is mostly due to shaky economic fundamentals, recession fears, and a lesser positive impact from the EV tax credit. But, on the global stage where Tesla is rolling out the Model 3 in Europe and China, Tesla is gaining market share in 2019 against the backdrop of a global EV market that remains on fire.
Thus, the only real concern here is waning demand in the U.S. after a late-2018 demand surge. That concern seems overblown. Of course, demand will slow after a big surge. Plus, the whole EV market is off to a slow start in 2019. This slowness won’t last forever, and Tesla won’t be following up a record-holiday season every quarter.
Thus, near term weakness is ephemeral. It will pass. When it does, TSLA stock will rally.
Improvements Are on Their Way
The dip in Tesla stock in early 2019 can be attributed to two things: falling demand and the disappearance of profits. I believe the rally in Tesla stock in the back-half of 2019 will be attributed to those two things reversing course. You will get rising demand and a re-appearance of profits.
On the demand front, Tesla’s domestic sales is weak in early 2019 for two reasons. One, the EV tax credit is maxed out, so there’s less incentive for consumers to buy such vehicles; hence the muted EV-market growth so far this year. Two, everyone who wanted a Tesla in the near term got one in late 2018 with the Model 3 surge.
Those two factors will reverse course later this year. First, Washington may boost the EV tax credit from 200,000 vehicles to 600,000 vehicles. That would help reinvigorate EV demand in the back-half of 2019. Second, come the second half of 2019, it will be six-plus months since the huge late-2018 Model 3 surge. That’s sufficient time for consumers to come back to the table with renewed demand.
On the profitability front, Tesla didn’t show a profit in Q1 because they lost scale. Scale will come back into the picture as demand picks back up in the U.S. Further, the company will better figure out international logistics, and enhance the supply chain globally to reduce costs. Net-net, Tesla’s margins should meaningfully improve over the next few quarters, and profits should re-appear in the back half of the year.
Broadly then, things will improve for Tesla over the next several months. Thus, with the stock trading at two-year lows and fundamental improvements on their way, now doesn’t seem like the best time to sell.
Bottom Line on TSLA Stock
It has been an ugly ride for Tesla stock in 2019. But it won’t stay ugly forever. The back half of the year will look a lot better than the first half. As we transition from this malaise to a much more positive environment, TSLA stock will rebound.
As of this writing, Luke Lango was long TSLA.
