Summary:
After a remarkable rally last year, Tesla stock has lost momentum.
The stock's lukewarm response to impressive Q2 results shows that the bull case is weakening.
Chip shortages, increasing competition could keep Tesla under pressure this year.
Lately, Tesla (NASDAQ:) stocks seem to have lost their magic. The stock has stopped reacting wildly to any positive development and disappointed investors who made fortunes while remaining loyal to the world's largest electric car manufacturer.
The latest example of this dampening optimism came when Tesla announced the stock on July 26. The company's shares fell more than 4% after the earnings report, far exceeding analyst consensus estimates.
During the quarter, when the California-based automaker produced a record 201,250 vehicles, its earnings more than tripled to $1.45 per share on an adjusted basis, beating the average $0.97 analysts had estimated. It was also the company's eighth consecutive profitable quarter.
Tesla's second quarter net income was about the same as the previous four quarters combined. The company reported revenue of approximately $12 billion for the period ending June 30, nearly double the amount in the corresponding period a year earlier.
Despite this strong earnings momentum, the stock did not jump as it once did on every shred of positive news. TSLA is up less than 6% in the past five days from yesterday's close. From the record high in January, Tesla shares have fallen nearly 23%.
So, what drives investors to shun this darling of market technology, even if the financial results have shown a dramatic turnaround?
As we see it, there are both short-term and long-term factors at play, pushing Tesla enthusiasts to the sidelines. Here are three key catalysts that make this EV a risky gamble right now, supporting our view that Tesla isn't a bargain in this environment:
1. Chip shortages
The global chip shortages that have hurt production for many automakers are also starting to squeeze Tesla. During its earnings call, Tesla told investors that the company's future growth rate will not be able to escape ongoing supply chain challenges.
For example, the company is struggling to introduce new models and secure parts for all of its vehicles. Tesla delayed its semi-trailer again – already two years late – and the first deliveries are now scheduled for 2022. The company attributed the delay to supply chain problems and a limited supply of battery cells, and tried to focus on getting it online. of new factories .
The company's plans for its first pickup, which is expected to go to customers as early as this year, are also affected by parts issues, CEO Elon Musk said during an earnings call, without giving a revised first delivery date.
How long the chip supply problems will last is currently a mystery. According to a recent report from the Wall Street Journal, chip makers are trying to bring in more supply through changes in manufacturing processes and by opening spare capacity to rivals, controlling customer orders to avoid hoarding and switching production lines. The bad news: there are no quick fixes, because building new production capacity usually takes years.
2. Competition is intensifying
Another threat challenging Tesla's dominance in the EV market comes from new sources of competition. In all, five of the largest automakers — Daimler (OTC:), Ford (NYSE:), General Motors (NYSE:), Stellantis (NYSE:) and Volkswagen (OTC:) — each have plans to spend an average of $6.5 billion to spend annually on electrification efforts over the next five to 10 years, according to Bloomberg.
In April, VW launched its new Audi Q4 e-tron model to compete with Tesla in the burgeoning market of compact crossover SUVs. Audi's EV model is one of twelve vehicles the German automaker has planned, including VW's ID.4 and an electric version of the Porsche Macan. VW aims to sell about 600,000 battery-powered cars this year.
As traditional automakers such as Volkswagen and GM accelerate their EV efforts, smaller Chinese entrants such as Nio (NYSE:) and Xpeng (NYSE:) are also vying for tech-savvy customers.
According to media reports, GM's EV plans will accelerate later this year as a Hummer pickup and Cadillac Lyriq sports car begin to roll off the automaker's production lines in Detroit. There will also be an electric pickup from Chevy Silverado.
In China, GM's cheaper Hongguang Mini EV, which it produces with two state-owned companies, is a hit. More than a quarter of a million of the models have been sold since the vehicle launched last July, outperforming international rivals such as Tesla's Model 3 and local competitors including Great Wall's (OTC:) Ora Black Cat. .
3. Lofty Valuations
Tesla's valuation has also been a major source of friction among top Wall Street analysts. Those who see Tesla as an overpriced stock argue that the company has no room for error when its stock is priced perfectly.
JPMorgan, which has an underweight rating for Tesla with a price target of $160, said in a recent note:
"Tesla's high rating leaves little room for less-than-perfect execution, as evidenced by a relatively lukewarm aftermarket response Monday to what was a fairly significant EBITA beat, and we saw some less-than-perfect takeaways , including the Tesla Semi's official delay to 2022 (although probably almost fully baked in); the Cybertruck's apparent late 2021 to 2022 delay (probably largely baked in).”
Even after the recent sell-off, Tesla has a market cap of $680 billion, making it worth more than the combined value of GM, Ford, Toyota Motor (NYSE:) and Volkswagen.
Bernstein Research, which has a sell recommendation for Tesla with a price target of $175, said in its note:
"We continue to struggle to justify the valuation of TSLA, which exceeds all other major automakers combined and which looks set to imply massive volume and industry-leading profitability going forward, which is historically unprecedented."
However, these bearish views should not hide the fact that many analysts believe that Tesla is more than an auto company and that its stock has more upside potential.
Adam Jonas of Morgan Stanley says Tesla should not be valued as an old car manufacturer. As cars become more connected to the internet, many other addressable markets are opening up and Tesla is well positioned to take advantage of those new opportunities.
Said Jonas in a Bloomberg report:
"While you're not comparing Tesla to auto companies anymore, you should be comparing it to software-as-a-service companies."
This difference is evident in Investing.com's poll of analysts on Tesla's stock price. Of the 35 analysts, 15 have a buy recommendation for the stock, 12 a neutral recommendation and eight a sell recommendation, with a 12-month consensus price target of $730.59.
Chart: Investing.com
For investors seeking technical signals to help make short-term investment decisions, the most popular indicators – moving averages, oscillators and pivots – are currently giving a buy signal, especially after Tesla's strong gains.
Bottom line
Tesla has remained the only credible player in the high-end EV market in recent years, but that equation is quickly changing with the arrival of new players and the massive spending plans put forward by the old automakers. These dynamics do not justify the company's current valuation, which assumes that Tesla will become the largest seller of cars in the US, while competitors will be unable to succeed.
