Investors who've been waiting eagerly to jump in and buy Tesla (NASDAQ:TSLA) on the first major dip after its massive rally this year, could be facing a difficult dilemma right now.
The electric carmaker is plummeting in the current market crash, falling more than 13% yesterday. That plunge has pushed Tesla deep into bear territory, with the stock now trading 37% from its record high, at $608.
But Tesla’s long-term shareholders don't have too much to complain about. Despite the sharp correction, after rallying about 280% in the past six months, the stock had risen to about $968 in early February, just before the broader meltdown hit the markets amid the intensifying coronavirus risks. Even after the current slump, the shares are still outperforming every single stock in the S&P 500 with its 167% gains in the past six months.
However, with markets now rapidly unraveling, Tesla lovers may find it hard to resist the urge to buy this top-performing stock on the dip. But we advise caution: this move to the downside has more room to run and there are many risks lurking for the carmaker in this fast changing macro environment.
The U.S. and Europe face the “distinct possibility” of a technical recession in the first half of 2020 as the coronavirus outbreak dampens both demand and supply, driving investors to safe havens, according to Pimco’s Joachim Fels.
“The worst for the economy is still to come over the next several months,” Fels, global chief economic adviser at Pacific Investment Management Co., wrote in a note to clients, which also cited concerns including a slump in China’s manufacturing and a weaker market for travel-related services.
Tesla’s Growth Under Threat
Bulls rallied behind Tesla this year, when founder and CEO Elon Musk, after years of over-promising and under-delivering, successfully turned a corner. The company beat analysts’ revenue estimates for 4Q and accelerated the introduction of the new Model Y crossover.
As well, the completion of its Shanghai factory and the company's success in exceeding its ambitious goal of selling 360,000 vehicles for the year also offered a powerful signal that Tesla could rapidly become a meaningful industry player if it continues to meet its targets.
But that upbeat scenario is now under serious threat from the impact of the deadly virus in China and globally, which is disrupting supply lines and increasing the risk of a recession. The slowdown in China is a major challenge for Tesla in particular because a significant proportion of the company’s growth trajectory is dependent on that country, one of the major global markets for electric cars.
Car sales in China saw the biggest monthly plunge on record in February as fear of the virus kept shoppers away. Receipts fell 80% last month, according to preliminary numbers from the China Passenger Car Association released last week.
On the demand side, it’s not clear how customers will make their choices about buying a new car when the cost of fuel is falling sharply. Historically, when crude oil and gas prices decline, electric vehicle sales — and solar installations — slow down, according to a report carried by CNBC. Tesla aims to sell 500,000 vehicles this year. This target may now prove hard to meet, some analysts say.
“Supply chain issues in China remain a lingering worry,” Wedbush Securities’ Dan Ives wrote, in a note to investors on Monday. “Given the demand overhang from the coronavirus outbreak in China as well as Europe we believe that 1Q unit demand levels will be difficult to hit for Tesla and is a dynamic currently being factored by the Street.”
Electric vehicle sales have been weakening over the past several quarters in China as the government rolls back subsidies on alternative energy vehicles. A slowing car market in China, the elimination of U.S. tax credits for Tesla buyers and the risk of Musk falling short again on his promises are some of the major obstacles that make the stock’s future path uncertain.
Investors should also note that even before the current sell-off, many analysts were warning about the bubble in Tesla’s stock, pointing to the stock’s highly speculative valuation. Analysts on average have a price target of about $500 for Tesla for the next 12 months.
Bottom Line
There is little doubt that Tesla is back on track after ramping up its production and building a factory in China that could prove a game-changer for the company’s long-term profitability.
But the automaker has never before gone through a recession that could trigger a sharp contraction in demand for new cars. Given these uncertainties, we still find it risky to buy Tesla shares in the middle of this massive sell-off.