Tax-Break Cut Is Likely to Sink Tesla Stock

The decline of the federal tax credit on Tesla's vehicles will likely hurt TSLA stock

Tesla (NASDAQ:TSLA) stock is expected to report its second-quarter results tomorrow after the market closes, and the owners of Tesla should be prepared for the company to provide weaker than expected Q3 guidance.

TSLA Stock: Tax-Break Cut Is Likely to Sink Tesla Stock
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That’s because the federal tax credit that buyers of its vehicles receive was slashed by 50% after July 1 to $1,875

The last time the federal tax break on Tesla’s vehicles fell by 50% was January 2019. Tesla’s Q1 results subsequently missed analysts’ average expectations by a wide margin, sending Tesla stock into a talispin. TSLA stock still hasn’t fully recovered from that blow, as the shares have lost 23% in 2019. But Tesla stock rallied 21% in June, and it has climbed 165 in the last month.

Why a Guidance Miss Is Likely

It makes sense that Tesla’s results would be very weak in the quarter after the federal tax break on the company’s vehicles take a big hit. That’s because, after having learned that the tax breaks are going to drop meaningfully soon, many consumers rush to buy Tesla vehicles before the tax credits decline. As a result, there’s not a great deal of demand for the company’s vehicles in the quarter after the breaks expire.

So it shouldn’t have been too surprising that, ahead of the tax credit decline on July 1, Tesla reported higher-than-expected Q2 sales.

But most analysts may have again greatly underestimated the negative impact of the tax-break cut on the subsequent quarter’s results. Analysts, on average, expect Tesla’s earnings per share to come in at a loss of 43 cents, up from a loss of $3.06 per share in the same period a year earlier. As a result, Tesla’s guidance could easily miss the consensus estimate, causing TSLA stock to lose much of the ground it had made up in June and July.

Tesla Stock Is Facing Other Hurdles

Tesla’s competition is constantly increasing, as top automakers continue to provide consumers with many more electric-car models from which to choose. And some automakers, including Jaguar, Audi, and Volkswagen, have fairly popular electric-car models that continue to qualify for the full federal tax credit.

Furthermore, Tesla Model 3 received a number of poor reviews, with Consumer Reports rescinding its”recommended” rating from the vehicle in February 2019, citing “some body hardware and in-car electronics problems, such as the screen freezing,” along with “complaints about paint and trim issues,” as well as concerns about the reliability of the vehicle’s touch screen.

Yesterday Roth Capital analyst Craig Irwin downgraded Tesla stock to the equivalent of “hold” from “buy,” citing valuation. And in a bad sign for Model 3 demand and Tesla stock, the company cut the prices of its Model 3 vehicles by $1,000-$5,000, Clean Technica reported on July 17. If the vehicle was selling like hotcakes, Tesla would likely not have cut its prices.

Tesla may report some positive news soon, as the Model 3, which recently arrived in China, could become quite popular in the Asian country. Excitement about the company’s upcoming Model Y crossover vehicle could also begin to build soon.

But following the rally of Tesla stock in recent weeks, a meaningful amount of positive news is probably already baked into TSLA stock, whose forward price-earnings ratio now stands at over 49. Consequently, any good news probably won’t meaningfully lift TSLA stock in the near and medium terms.

The Bottom Line on Tesla Stock

Given the July 1 decline of the federal tax credit on Tesla’s vehicles, there’s a good chance that Tesla’s Q3 guidance will miss expectations, causing TSLA stock to decline. Meanwhile, TSLA is facing increased competition and still has to combat some negative perceptions about its Model 3 vehicle. While the company could be boosted by some good news in the near and medium terms, it probably won’t lift TSLa stock much, given the shares’ high valuation.

Given this outlook, investors may want to sell their shares of TSLA stock ahead of the company’s Q2 results.

As of this writing, the author did not own shares of any of the aforementioned stocks. 

Article printed from InvestorPlace Media,

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