For nearly a two-month period, Tesla (NASDAQ:TSLA) had many investors fooled. After tumbling badly for most of the year, TSLA stock mounted a very respectable rally.
From the end of May until just hours prior to the tech firm’s second quarter of 2019 earnings report, shares jumped 43%. However, the façade came crumbling down after the critical financial disclosure.
Still, I can appreciate why investors are confused about the resultant volatility. After management broke down their key metrics, Wall Street wasted zero time responding. Tesla stock cratered during afterhours trading on Wednesday. When the regular session opened on Thursday, shares found themselves gaping down to $233.50, eventually closing at $228.82.
But why? Sure, Tesla earnings disappointed on paper because it missed the Street’s expectations for both revenue and profitability. Consensus estimates heading into Q2 was for per-share earnings to generate loss of 40 cents. Instead, the company incurred a loss of $1.12 per share. Revenue of $6.35 billion missed the consensus forecast of $6.41 billion.
That said, in the year-ago quarter, Tesla rang up $4 billion in top-line sales. Thus, we just saw a nearly 59% growth rate. For those who hold a bullish opinion of TSLA stock, the erosion in equity value doesn’t match the fundamentals.
After all, Tesla stock is a legitimate growth name. Utilizing groundbreaking technology that has in many ways disrupted the automotive old guard, Tesla essentially mainstreamed electric vehicles (EVs). Before they arrived on the scene, EVs were slow, ugly abominations.
I agree that a miss on earnings is a poor excuse to dump TSLA stock. However, I don’t disagree with the dumping, and here’s why:
Golden Age of “ICE” Hurts Prospects for TSLA Stock
Noted Tesla bull Ben Kallo of Robert W. Baird & Co slammed the markets’ “overreaction” to the Q2 report. In Kallo’s view, Tesla exceeded expectations: TSLA has $5 billion on the balance sheet, strong domestic demand, and even stronger demand in China.
However, I don’t believe Wall Street necessarily reacted to the print. Instead, they’re recognizing the challenges that impact Tesla stock where the rubber meets the road. In other words, Tesla has serious competition in the automotive space, and Q2 reaffirmed this headwind.
As Growth Investor editor Louis Navellier pointed out, Tesla has a pricing problem. Their flagship SUV, the Model X, is priced well above competing EVs from luxury brands. In response, TSLA reduced production of the Model X (and the pricey Model S) and ramped up the Model 3.
That move led to another issue: all things considered, the Model 3 isn’t profitable, according to Navellier.
And the situation could worsen for Tesla stock because of a great irony: we’re in the golden age of “ICE,” or the internal combustion engine.
While advancing technologies sparked new innovations like EVs, they also substantially upgraded old school platforms. For the kind of money that you spend on the cheapest Tesla, you have many options. Moreover, well-established favorites such as the Toyota (NYSE:TM) Camry offer everything you want in one package: performance, good looks, practicality and reliability.
Another point to consider is that gasoline prices are at multi-year lows. Of course, that could change quickly. Even with a spike in demand, I can’t imagine prices will return to record highs. Supply is just too plentiful.
That ultimately means an abundance of compelling, attractive ICE vehicles that will disrupt the disrupter.
Infrastructure Is Just Not Ready for Tesla
To summarize, extraordinary competition hurts the near-to-intermediate term narrative of TSLA stock. Even if management gets past that hurdle, they still have a longer-term headwind to address: the U.S. and global infrastructure is just not ready for mass-scale EVs.
Let’s take the current heat wave that’s hitting many parts of the U.S. as an example. Rolling blackouts occur because unusual spikes in demand (such as people turning on their air conditioners at full blast) stressed already stretched power grids. What happens when on top of this season demand, we have millions of EVs draining electricity?
I’m not an expert in this field, but I imagine the results wouldn’t be too pleasant.
Let’s also discuss a mundane topic: garages. According to government statistics, 63% of housing units in the U.S. have garages or carports with electricity access. In the western regions, that metric jumps to 76%.
But here’s the thing: I’m sure nearly every working adult required some kind of vehicular transportation to get to work. Therefore, whether you’re talking 63% or 76%, the market for EVs is limited before you initiate your first advertising campaign.
Combined with the problems Tesla has on the business end, it’s difficult to recommend TSLA stock to anyone but speculators.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
