Tesla (NASDAQ: TSLA) has so many problems in 2019 that they’re difficult to count. Many of these problems stem from management miscalculating its guidance. However, some are simply a case of being in the wrong place at the wrong time.
The trade war is a perfect example of the latter group of problems. Having the U.S. and China at each other’s throats while Tesla is investing heavily in the latter isn’t Elon Musk’s fault. Nonetheless, it is hurting Tesla’s business.
Here’s a look at just how much exposure TSLA stock has to China.
The Numbers Don’t Favor Tesla Stock
Loup Ventures founder and long-term TSLA stock bull Gene Munster recently broke down Tesla’s China numbers and why near-term expectations are still too high.
Tesla has said it will deliver 360,000 to 400,000 vehicles in 2019. On May 1, prior to the latest round of tariff hikes, consensus analyst estimates already called for Tesla to miss the low end of that guidance. Munster now estimates Tesla will deliver just 310,000 vehicles this year, about 14% below the low end of company guidance.
Munster also recently lowered his 2019 China vehicle delivery estimate from 70,000 vehicles to just 40,000 vehicles. Loup Ventures previously expected China to account for roughly a quarter of all Tesla deliveries this year. That estimate is now down to just 13%.
How important is China to Tesla’s growth story? China is the single largest electric-vehicle market in the world.
Munster says there are two concerning trends in China for investors of TSLA stock. First, Chinese import tariffs could negatively impact Tesla. Some analysts are expecting Tesla to be exempt from new tariffs, but China has yet to address the issue.
However, perhaps more importantly, Tesla’s brand could get sucked into a Chinese consumer boycott against American companies. Last week, Citi said its latest research suggests Chinese consumers are already shifting their demand preferences away from American companies like Apple (NASDAQ:AAPL).
Even if a trade resolution passes, there’s no guarantee Chinese consumers won’t maintain their resentment against American companies like Tesla.
TSLA Stock Needs Growth
There’s no doubt China is a major opportunity for companies like Apple and Tesla. However, Tesla needs China a lot more than Apple does.
China is just one part of Tesla’s much larger problem: demand. Tesla has not been consistently profitable. It has not successfully expanded its operations to the scale of legacy automakers Ford (NYSE: F) and General Motors (NYSE: GM). TSLA has not demonstrated that its driverless-vehicle technology is superior to the competition.
Yet even after losing more than 40% of its value in 2019, TSLA stock still carries a market capitalization of $33 billion. That’s roughly on par with Ford at $38 billion.
Apple will be profitable and successful with or without growth in China. Tesla stock is an emotionally driven investment with terrible fundamentals. Barclays analyst Brian Johnson says a big part of the company’s valuation has always been the “dream” scenario that Tesla will rapidly grow into its valuation.
“Our model estimates most closely mimic a baseline ‘niche luxury’ scenario — which would only lead to a present value share price of $133,” Johnson says.
In other words, without the growth story, Tesla stock is worth $133 per share. Without China, the much-hyped tech firm looks ugly.
Near-Term Is Critical
The trade war will likely come to an end at some point. Tesla may even shore up its demand eventually. But given a slowdown in global economic growth and TSLA’s consistent cash burn, the market has limited patience.
Loup Ventures estimates Tesla bought itself some time with its recent capital raise. But it still needs results sooner rather than later.
“Our high-level math suggests the recently raised $2.7B gives a two-year cushion if deliveries come in at 300k for both 2019 and 2020. If deliveries fall below 300k in each of the next two years, the cushion will be less than 2 years,” Munster says.
If Tesla’s share price continues to fall, the next capital raise may be difficult or impossible. Tesla doesn’t need to fix its China problems this quarter or next quarter. However, without China as part of the story, TSLA stock could be in trouble in the long term.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
