What’s Really Driving Demand for Tesla Stock?

Government incentives present both opportunity and risk

Judging from its fourth-quarter vehicle delivery numbers, it’s hard not to have an optimistic take on Tesla (NASDAQ:TSLA). With Wall Street ever skeptical of the sometimes-controversial organization, the good news couldn’t have come at a better time. Thanks to a dramatic burst in sentiment, Tesla stock exploded higher in the final months of 2019, reversing earlier damage.

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In recent years, though, TSLA stock has endured substantial turbulence. Therefore, those who are arriving late to the party naturally have concerns about holding the bag. However, Tesla’s strong Q4 results offers food for thought. Specifically, the automotive technology firm delivered 112,000 vehicles, exceeding the Street’s consensus estimate of approximately 106,000 units.

More importantly, the company’s mass market Model 3 enjoyed a standout quarter with 92,550 vehicle deliveries. This was noticeably above covering analysts’ consensus target of 87,940 units. Plus, the higher-end Model S and X series delivered numbers that were in line with expectations.

Unsurprisingly, several analysts took encouragement from the positive Q4 deliveries. In particular, Wedbush analyst Daniel Ives noted that a significant factor in the results came from Tesla’s continued momentum in Europe. As Ives put it, the Street has noticed management’s ability to “not just talk the talk but walk the walk.” With more results like this, Tesla stock could legitimately build off its recent bullish trajectory.

Additionally, the company’s Giga 3 factory in Shanghai, China is producing over 1,000 cars weekly. Should the Chinese and European market continue generating strong demand, the long-term thesis for TSLA stock only gets better.

But as impressive as the delivery stats are for Tesla stock, one risk factor is the motivation behind this demand.

Global Picture for Tesla Stock Not All Peaches and Cream

With the current political state increasingly focused on clean energies and zero-emission protocols, you’d think that TSLA stock has a fairly easy pathway to long-term profitability. And with progressive Europe ramping up its go-green initiatives with generous tax benefits and incentives, electric vehicles as an industry appear poised to upend the internal combustion engine.

A few countries within the European Union have taken these initiatives to heart. For instance, Norway now has the highest number of EVs per person in the world. Potentially, other countries will follow suit, further driving the case for Tesla stock.

On the surface, that all sounds well. Until, that is, someone has to pay for these incentives. While the Norwegians should be commended for their zero-emission efforts, they’re going about it through big government policies. Primarily, Norway uses an automotive taxation system. Essentially, the more you pollute, the more you pay. Under this draconian law, the government forcibly made EVs cheaper comprehensively than fossil-fueled cars.

However, that won’t fly in the more conservative regions of Europe. It also raises questions about how sustainable EV-based incentives are. If the issuing government suffers economic headwinds, it doesn’t make sense to continue offering favorable financial considerations.

Furthermore, this isn’t a theoretical risk to TSLA stock. For instance, the Trump administration has proposed scaling back EV tax credits. Of course, China is also doing the same, which has hurt its own EV market, most notably Nio (NYSE:NIO). Thus, it begs the question, what’s driving demand? The cars themselves or the incentives?

According to the European Automobile Manufacturers Association, four EU members don’t offer any EV-related tax benefits or incentives. And these countries – Croatia, Estonia, Lithuania, Poland – feature very low EV adoption.

EVs Still Have an Uphill Battle

Even if issuing nations sustain their EV incentives, the industry still has another challenge: convincing those who have made the jump to electric to stay the course.

Although EVs represent a major technological breakthrough, they’re surprisingly frustrating to own. As you know, auto accidents are a daily feature of metropolitan life. For most of us who drive “regular” cars, repair downtime is very reasonable.

Not so with EVs, especially Teslas. According to several customer testimonials, it’s not unusual for a relatively simple repairs to last months. That’s simply unacceptable, considering that Tesla really is a high-end luxury brand. What’s the point of paying so much money for such inconveniences?

Plus, Teslas aren’t the most reliable vehicles. In 2019, Consumer Reports stopped recommending the Model 3 due to persistent issues before upgrading it late in the year. But for those suffering problems, they could become disillusioned with the EV platform, voicing their displeasure to family and friends.

Again, I’ll freely admit that Tesla’s Q4 delivery results were impressive. But the dependency on EV demand to incentives is a significant risk that you shouldn’t ignore.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/whats-really-driving-demand-for-tesla-stock/.

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