Tesla’s China Sales Increase Provides Little Substance

  • Don’t let Tesla’s (NASDAQ:TSLA) latest China sales report fool you. This stock still has a long way to drop!
  • Tesla’s broad-based sales are declining for the first time in two years.
  • The U.S. Treasury yield curve implies that contractionary monetary policies could wane on durable goods.
  • Tesla is overvalued and exhibits unfavorable beta sensitivity.
TSLA Stock - Tesla’s China Sales Increase Provides Little Substance

Source: Sheila Fitzgerald / Shutterstock.com

Tesla (NASDAQ:TSLA) surprised the market with its June preliminary deliveries report, which unveiled a 1.42x month-over-month increase in Chinese regional sales. Regionally, the electric vehicle giant sold more than 78,000 vehicles last month, a 1.35x year-over-year increase. Many investors are likely to jump on a recovery play as the company’s sales recovery could be misinterpreted for early-stage momentum. However, it’s necessary to recognize that Tesla’s China sales could be a temporary uptick as regional political risk remains elevated. In addition, TSLA stock has significant valuation issues, causing the current market environment to act unkindly toward it. Moreover, Tesla’s beta sensitivity means that it could be one of the major losers if a bear market persists.

Generally speaking, I believe TSLA stock is overhyped and set for further declines. Let’s dive deeper into it!

Ticker Company Price
TSLA Tesla $699.20

Tesla’s Prospective Sales

Two charts displaying the Treasury Yield Curve and the Historical 10Y-1Y Spread on Treasury Yield
Click to Enlarge
Source: Gurufocus

Investors shouldn’t be overwhelmed by TSLA’s latest China sales surge. Much of the sales have to do with the supply-side, where factories were allowed to produce again after certain pandemic restrictions were lifted. As such, sales proliferated. Additionally, Chinese pandemic lockdown policies have been inconsistent, to say the least. Thus, the question beckons whether Tesla’s China sales are sustainable in the long haul.

Furthermore, Tesla’s broad-based sales are taking a dip. The firm’s second-quarter sales report conveyed a decline in quarterly sales for the first time in two years. Tesla produced 258,000 vehicles in the quarter and delivered 254,659, reconciling to a 17.9% year-over-year decrease. Although much of the firm’s receding sales figure was down to production constraints, there’s much reason to believe that the economic climate is taking its toll on consumers.

I want to elaborate on the economy and what it means for TSLA stock. The U.S. Treasury Yield Curve implies that interest rates could settle above the 3% level before declining again. This means that the leading consumer economy in the world will be subject to contractionary monetary policies, which could see global consumer spending power wane. Moreover, the contraction of economic growth will likely affect the automotive industry as durable goods sales negatively correlate with rising interest rates. As such, Tesla could see its five-year compound annual growth rate of 48.72% retrace to a growth trend more stationary to gross domestic product growth soon.

Price Level Concerns With TSLA Stock

Using relative valuation metrics to assess growth stocks usually isn’t prudent. Nonetheless, whenever a bear market appears, it is probable that risk-averse investors will sell their overvalued assets first. TSLA stock is trading at 11.29x its sales, 52.32x its cash flow, and 77.09x its earnings. Thus, it is safe to say that we’re looking at an overvalued stock here.

Additionally, TSLA stock’s high beta status could coalesce with its poor valuation metrics to cause a tremendous drawdown. Tesla’s beta coefficient of 2.13 means that it exhibits excess sensitivity to the broader market, which is exactly what you do not want in a bear market.

So, all matters considered, I think TSLA stock is a strong sell!

On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Steve co-founded Pearl Gray Equity and Research in 2020 and has been responsible for institutional equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa. He holds an MSc in Investment Banking from Queen Mary – University of London and is working towards his Ph.D. in Finance, in which he’s attempting to challenge the renowned Fama-French 5-factor pricing model by incorporating ESG factors. His articles are published on various reputable web pages such as Seeking Alpha, TipRanks, Yahoo Finance, and Benzinga. Steve’s articles on InvestorPlace form an interesting juxtaposition between mainstream opinion and objective theory. Readers can expect coverage on frequently traded stocks, cryptocurrencies, crowdfunding, and ETFs.


Article printed from InvestorPlace Media, https://investorplace.com/2022/07/teslas-china-sales-increase-provides-little-substance/.

©2022 InvestorPlace Media, LLC