Late last month, Tesla (NASDAQ:TSLA) shares were on a tear. During this time, investors bid up Tesla stock not once, but twice. TSLA’s price performance in May has been stellar. Shares have retraced a substantial portion of last month’s gains. The stock may fall back to previous lower price levels.
Recent news on Chinese EVs may not provide much support for Tesla and other EV makers. The potential catalysts for a TSLA recovery haven’t fully disappeared, but it’s too risky to be long this stock today.
Why Tesla Stock has Reversed Course
On May 3, we discussed what drove Tesla’s April mega rally, and argued why said rally could prove short-lived. Based on subsequent price action, it’s clear the market came to the same conclusions we did, regarding recent developments.
Regarding Tesla’s latest quarterly results, the market finally concluded that current issues with growth and margins far outweigh the potential for improved results and new product launches down the road.
When it came to Tesla getting the regulatory go-ahead to sell its full self-driving driver-assistance package in China, investors figured out that this isn’t likely to be much of a game changer.
Hence, it’s not surprising that Tesla stock, after climbing back to nearly $200 per share, has slipped back to the low-$170s over the past few weeks. As hinted above, there is a recent development that may have you convinced that the bull case for TSLA is once again getting stronger.
However, taking a closer look, we come to a far different conclusion. Instead of being a tremendous tail wind for the company, this development could be a headwind.
The development I’m talking about, of course, is the U.S. Federal Government’s plans to raise tariffs on China-built EVs.
Not the Tailwind You’ve Been Looking For
On May 14, the Biden Administration announced a series of tariffs on various Chinese products. These include new tariffs on solar cells, steel and medical equipment, but it’s the increased EV tariffs garnering the most attention.
As a result of this tariff hike, tariffs on Chinese EV imports will rise from 27.5% to 102.5%. Again, at first that may sound like good news for Tesla stock. After all, the company plans to soon roll out lower-priced vehicles.
These tariffs will seriously erode any advantage that a lost-cost Chinese EV producer could have, if it chose to enter the U.S. auto market.
However, unlike Europe, the U.S. is not a big Chinese EV exporting market. Chances are Tesla or any other U.S. automaker wasn’t facing the prospect of competing with China-made EVs anytime soon. At the same time, there could be serious blowback with these tariffs.
The resultant further raising of tensions between the U.S. and China may not have a major negative impact on Tesla and its Chinese operations, but the last thing this company needs is another set of issues to contend with, atop the aforementioned growth and margin issues.
Bottom Line: Keep Waiting for Lower Prices
Tesla’s situation could worsen before improving. If revenue growth and profitability don’t improve, investors may question why TSLA has a high forward earnings multiple.
That said, at the right price, Tesla could go from questionable growth story, to oversold bottom-fisher’s buy.
At a lower valuation, a potential comeback fueled by lower-priced vehicle models, further progress with its Robotaxi project, and with an eventual rebound in U.S. and Chinese EV demand growth will no longer be priced into the stock.
But until Tesla stock becomes truly oversold, it’s best to leave it at the charging station, and wait for lower prices.
Tesla stock earns a D rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
