On Feb. 19, I warned Tesla (NASDAQ:TSLA) stock investors about potential troubles in China. At the time, Tesla CEO Elon Musk was tweeting about Bitcoin (CCC:BTC-USD) to distract from negative headlines out of China.
I believe Musk is a true genius in his ability to manage Tesla’s brand and control the company’s online narrative.
While Tesla investors are distracted with Bitcoin and now Dogecoin (CCC:DOGE-USD) memes, Tesla’s auto business in China is struggling.
Controlling the TSLA Stock Narrative
Musk’s devoted followers see him as a champion of engineering and green energy. I believe his true long-term legacy will have more do with the way he has effectively managed social media to cultivate a brand for himself and his company.
I don’t want to dismiss what Tesla has accomplished as a company. However, there could not be more of a disconnect between the actual business Tesla does and the absurd valuation of TSLA stock. That gap exists because of Musk’s ability to convince investors that Tesla is something it is not.
One way Musk has repeatedly protected Tesla’s online narrative, particularly on social media, is by distracting from negative headlines. I previously pointed out that Musk’s announcement in February that Tesla was buying Bitcoin coincided perfectly with troubling news out of China. I believe that timing was no coincidence.
On Feb. 8, China’s state-controlled newspaper The Global Times publicly bashed Tesla for safety issues and quality controls. It listed “unexpected accelerations, battery fires and abnormal over-the-air (OTA) upgrades” among the major issues. It also said Tesla was facing “rising public scrutiny over its quality controls.”
At the time, the whole world seemed to be obsessed with Tesla buying Bitcoin. I thought the China news was much more important.
Tesla’s China Numbers Dive
In the three months since I wrote that story about Tesla’s China problem, TSLA stock dropped 26.3%. On May 10, The Global Times reported that Tesla’s sales dropped 27% month-over-month in April.
The latest sales numbers come just two days after The Global Times reported a crash in China involving a Tesla traveling at more than 98 miles per hour.
“There have been more than ten accidents involving Tesla electric cars that went ‘out of control’ in China since 2020, according to some account,” the story says.
On May 10, Tesla also announced it has halted plans to expand its Shanghai plant and expand its China production capacity.
Do Tesla vehicles have safety problems? I don’t know. Musk’s social media warriors were quick to dismiss the reports as Chinese propaganda. The theory is that the Chinese Communist Party is bashing Tesla to support its domestic electric vehicle companies. Nio (NASDAQ:NIO) and Xpeng (NYSE:XPEV) are among the most popular U.S.-listed Chinese EV stocks.
My answer to that theory is so what? It doesn’t matter why the CCP is cracking down on Tesla and whether or not the reasons are legitimate. The results are the same either way. Tesla’s China sales tanked in April, and China is a key part of the narrative that sent TSLA stock soaring more than 1,000% in the past two years.
Musk’s Red Flag
When Elon Musk tweets out something that will obviously go viral on social media, I always know to look for a red flag. As I said before, Musk’s true genius is his ability to control the social media narrative among his followers. And I believe the overwhelming majority of Tesla’s value is based on narrative, not business. After all, the stock is extremely overvalued compared to both auto stock peers and high-growth tech stock peers.
On May 10, Musk tweeted out a poll asking his followers whether or not they wanted Tesla to accept Dogecoin.
In my opinion, this tweet is the perfect example of Musk’s genius. It’s not an announcement that Tesla is accepting Dogecoin. It’s not an announcement of anything, actually. It was carefully constructed to get the financial market media and social media all worked up. It has nothing to do with Tesla’s business.
When I saw that tweet, I knew the China numbers must be out, and they must not be good. Tesla has a problem in China. China is a huge part of the long-term Tesla bull case and the current TSLA stock valuation. Musk needs to find a way to get back on China’s good side and fast or TSLA stock could be in big trouble.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.