{"id":59236,"date":"2024-01-16T06:00:22","date_gmt":"2024-01-16T11:00:22","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=59236"},"modified":"2024-01-16T12:09:53","modified_gmt":"2024-01-16T17:09:53","slug":"investor-concerns-rise-as-tesla-slashes-prices-in-china-sell-or-hold","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2024\/01\/investor-concerns-rise-as-tesla-slashes-prices-in-china-sell-or-hold\/","title":{"rendered":"Investor Concerns Rise as Tesla Slashes Prices in China: Sell or Hold?"},"content":{"rendered":"

China\u2019s electric vehicle (EV) stocks<\/span> started the new year on the wrong foot<\/span><\/a>, as heightened competition and continued price wars pressurized the profitability of automakers.<\/span><\/p>\n

Morgan Stanley highlighted growing competition concerns in its note: \u201cInvestors remain cautious as China\u2019s auto market has had a volatile start to the year as competition and macro uncertainties persist.\u201d<\/span><\/p>\n

Also, in a report on the Chinese EV industry earlier this month, Bernstein analysts said, \u201cWe expect competition within the domestic market to remain intense and put pressure on pricing and profitability.\u201d<\/span><\/p>\n

There are too many automakers fighting for EV market share in China.<\/span> Tesla, Inc. (TSLA)<\/span><\/a> has slashed the<\/span> prices of its Shanghai-made vehicles by up to 6%<\/span><\/a> in a strategic move to maintain its leading position in the premium segment of the world\u2019s largest EV market.<\/span><\/p>\n

The Texas-based company recently announced that the base version of the Model Y crossover vehicle starts at nearly $36,000, a decline from about $37,000. The base Model 3 now starts at about $34,500, down from $36,500.<\/span><\/p>\n

Tesla has cut prices aggressively across its markets worldwide since late 2022 due to higher interest rates, a period of uneconomic certainty, shifting consumer sentiment, and intense competition.<\/span><\/p>\n

For instance, a U.S. rear-wheel drive Model 3 began at approximately $47,000 in 2022. Its price was cut to about $44,000 in January 2023 and $40,000 following a price cut in April. After one more cut in October, the price of a new U.S. Model 3 ended 2023 at about $39,000.<\/span><\/p>\n

The recent price cuts in China by Tesla will fuel more fears about competition and profit margins among investors.<\/span><\/p>\n

Shares of TSLA have plunged more than 7% over the past month and nearly 19% over the past six months.<\/span><\/p>\n

Now, let\u2019s discuss several other factors that could impact TSLA\u2019s performance in the upcoming months:<\/span><\/p>\n

Quarterly Deliveries and Production Beat Estimates<\/b><\/p>\n

Tesla delivered nearly<\/span> 484,000 vehicles in the fourth quarter<\/span><\/a>, surpassing<\/span> analyst expectations of 483,173<\/span><\/a>, as compiled by Bloomberg. The company produced 494,989 vehicles, beating the consensus estimate of 482,336. For the full year 2023, the Elon Musk-led automaker reported deliveries of 1.81 million and production of 1.85 million, representing growth of 38% and 35% year-over-year, respectively.<\/span><\/p>\n

The company delivered 461,538 Model 3 and Model Y vehicles during the fourth quarter and reported production of 461,538 for these models. TSLA didn\u2019t break down Model S or X production or delivery numbers, instead batched them into \u201cOther Models.\u201d It delivered 22,969 other models and produced 18,212 vehicles for the quarter.<\/span><\/p>\n

In 2022, TSLA reported annual deliveries of 1.31 million and production of 1.37 million vehicles, a<\/span> nearly 40% increase from 2021<\/span><\/a>.<\/span><\/p>\n

During the last earnings call held in October 2023, TSLA\u2019s management said that the company would hit at least 1.8 million deliveries for the full year, a number they had revised down from a 2 million target earlier.<\/span><\/p>\n

Dethroned as the EV Global King<\/b><\/p>\n

Chinese automaker<\/span> BYD Co. (BYDDY)<\/span><\/a> reported that it<\/span> delivered 526,409 fully electric cars<\/span><\/a> during the fourth quarter, topping TSLA for the first time. China\u2019s top-selling car brand reported EV and hybrid sales of<\/span> 341,043 in December 2023<\/span><\/a>, including 190,754 all-electric cars, aided by aggressive year-of-year discounting. In total, BYD sold 3.01 million vehicles in 2023.<\/span><\/p>\n

Moreover, BYD<\/span> produced more than 3 million new electric vehicles<\/span><\/a> in 2023, beating TSLA\u2019s production for a second consecutive year.<\/span><\/p>\n

Disappointing Last Reported Financials<\/b><\/p>\n

In the third quarter that ended September 30, 2023, TSLA posted revenue of $23.35 billion, missing analysts\u2019 estimates of $24.14 billion. Its gross profit decreased 22.4% year-over-year to $4.18 billion. The company\u2019s operating expenses increased 42.5% year-over-year to $2.41 billion.<\/span><\/p>\n

Musk-led EV maker reported income from operations of $1.76 billion, down 52.2% from the prior year\u2019s period. Its adjusted EBITDA declined 24.4% year-over-year to $3.76 billion. The automaker\u2019s adjusted net income attributable to common stockholders decreased 36.6% from the previous year\u2019s quarter to $2.32 billion.<\/span><\/p>\n

Furthermore, the company reported an adjusted EPS of $0.66 for the third quarter, below the consensus estimate of $0.73. That compared to $1.05 in the same quarter of 2022.<\/span><\/p>\n

Tesla\u2019s net cash provided by operating activities was $3.31 billion, down 35.1% year-over-year. Its free cash flow decreased 74.3% from the year-ago value to $848 million.<\/span><\/p>\n

Unfavorable Analyst Estimates<\/b><\/p>\n

Analysts expect TSLA\u2019s revenue for the fourth quarter (ended December 2023) to increase 6% year-over-year to $25.76 billion. However, the consensus EPS estimate of $0.73 for the same period reflects a 38.3% year-over-year decline. In addition, the company has missed the consensus revenue estimates in three of the trailing four quarters.<\/span><\/p>\n

For the fiscal year 2023, the company\u2019s EPS is expected to decrease 21.8% year-over-year to $3.18. Street expects the automaker\u2019s EPS to decline 4.6% year-over-year to $0.81 for the first quarter ending March 2024.<\/span><\/p>\n

Suspension of Production at German Factory<\/b><\/p>\n

According to<\/span> Reuters<\/span><\/a>, Tesla plans to suspend most production at its factory outside <\/span>Berlin in Grunheide, Germany, from around January 29 to February 11 due to the ongoing conflict in the Red Sea that has disrupted global trade.<\/span><\/p>\n

\u201cThe considerably longer transportation times are creating a gap in supply chains,\u201d Tesla <\/span>told Reuters<\/span><\/a> in a statement.<\/span><\/p>\n

Analysts at Baird estimate Tesla produces between 5,000 vehicles and 7,000 vehicles per week at its Berlin factory. The shutdown of this vehicle assembly plant in Germany would result in a<\/span> 10,000-14,000 hit<\/span><\/a> to deliveries in the first quarter of 2024, said analysts Ben Kallo and David Sunderland in a note.<\/span><\/p>\n

The Baird analysts added that they are \u201cwary\u201d of further effects on the company\u2019s supply chain, and they are \u201cclosely monitoring\u201d any impact on its shipping routes from China.<\/span><\/p>\n

Tesla EVs in Regulators\u2019 Scrutiny<\/b><\/p>\n

Moving into 2024, Tesla faces growing pressure from regulators. The auto giant faces a<\/span> new investigation from regulators in Norway and Sweden<\/span><\/a> after a Reuters report alleging that the company covered up defects and charged its customers for repairs that should have been under warranty.<\/span><\/p>\n

In a statement to Reuters, <\/span>Sweden\u2019s Transport Agency confirmed \u201cthat investigative work is also underway with us\u201d shortly after Norway\u2019s traffic safety regulator launched its probe into reports of repeated suspension failures affecting Tesla models.<\/span><\/p>\n

Norwegian Public Roads Administration (NPRA) senior engineer Tor-Ove Satren stated that the<\/span> agency began questioning Tesla<\/span><\/a> in September 2022 and asked the auto company to assess consumer complaints about lower rear control arms breaking on its Model S and X vehicles.<\/span><\/p>\n

Satren added the agency could recommend that Tesla recall all model years of the S and X vehicles to replace rear lower control arms if it determines they pose a \u201cserious risk.\u201d<\/span><\/p>\n

Concerns Surrounding Tesla\u2019s Cybertruck<\/b><\/p>\n

Experts<\/span> raised safety concerns<\/span><\/a> regarding the angular design of Tesla\u2019s Cybertruck as the electric pickup truck\u2019s stiff stainless-steel exoskeleton could hurt pedestrians and cyclists, damaging other vehicles on roads.<\/span><\/p>\n

\u201cThe big problem there is if they really make the skin of the vehicle very stiff by using thick stainless steel, then when people hit their heads on it, it\u2019s going to cause more damage to them,\u201d said Adrian Lund, the former president of the Insurance Institute for Highway Safety (IIHS), whose vehicle crash tests are an industry standard.<\/span><\/p>\n

Elon Musk earlier mentioned in Tesla\u2019s<\/span> third-quarter earnings call<\/span><\/a> that the company was facing several challenges in scaling its production. He also cautioned that Cybertruck won\u2019t deliver considerable positive cashflow for 12 to 18 months after production starts.<\/span><\/p>\n

Musk said, \u201cIt is going to require immense work to reach volume production and be cashflow positive at a price that people can afford\u201d with the Cybertruck. He added, \u201cI just want to temper expectations for Cybertruck. It\u2019s a great product, but financially, it will take a year to 18 months before it is a significant positive cash flow contributor.\u201d<\/span><\/p>\n

Elevated Valuation<\/b><\/p>\n

In terms of forward non-GAAP P\/E, TSLA is currently trading at 68.73x, 345.6% higher than the industry average of 15.42x. Likewise, the stock\u2019s trailing-12-month EV\/Sales and EV\/EBITDA of 6.94x and 41x are significantly higher than the industry averages of 1.23x and 9.88x, respectively.<\/span><\/p>\n

Additionally, the stock\u2019s forward Price\/Sales of 7.12x is 695.1% higher than the industry average of 0.89x. Its forward Price\/Cash Flow multiple of 54.58 compares to the industry average of 9.88.<\/span><\/p>\n

Decelerating Profitability<\/b><\/p>\n

TSLA\u2019s trailing-12-month EBITDA margin and net income margin of 15.80% and 11.21% are higher than the respective industry averages of 10.96% and 4.56%. However, the stock\u2019s trailing-12-month gross profit margin of 19.81% is 44% lower than the 35.38% industry average.<\/span><\/p>\n

Also, the stock\u2019s trailing-12-month levered FCF margin of 1.68% is 68.9% lower than the industry average of 5.40%.<\/span><\/p>\n

Bottom Line<\/b><\/p>\n

TSLA has repeatedly cut prices in China and other global markets since late 2022, leading other automakers to respond and squeezing profit margins industry-wide. Several price cuts were made due to weakened demand amid <\/span>higher interest rates and a period of economic uncertainty coupled with intense competition in the EV industry.<\/span><\/p>\n

Following the decline of news that the company could suspend production at its Giga Berlin factory due to Red Sea-related supply disruptions, Tesla\u2019s stock plunged further after the automaker announced new price cuts in China. These price cuts come as competition continues to get intense on the Chinese mainland.<\/span><\/p>\n

Moreover, BYD has gone more upmarket, pushing into segments where TSLA operated and found success.<\/span><\/p>\n

The automaker\u2019s third-quarter revenue and earnings missed analysts\u2019 estimates. Further, Wall Street appears bearish about TSLA\u2019s outlook as the company grapples with several challenges, including supply disruptions, growing regulatory concerns, sliding margins due to price cuts, intense competition, and weakened consumer demand amid a high-interest rate environment.<\/span><\/p>\n

In mainland China, passenger EV sales growth<\/span> plunged to 28% in the third quarter<\/span><\/a> of 2023 compared to 108% in the same period a year ago, as per China Association of Automobile Manufacturers data quoted by Fitch Ratings.<\/span><\/p>\n

According to Fitch Ratings, the growth slowdown will get worse this year. \u201cWe expect China\u2019s domestic passenger car demand to increase modestly in 2024 to nearly 22 million units amid economic uncertainty,\u201d<\/span> said Fitch Ratings<\/span><\/a>.<\/span><\/p>\n

Considering these factors, TSLA shares are best avoided now.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

China\u2019s electric vehicle (EV) stocks started the new year on the wrong foot, as heightened competition and continued price wars pressurized the profitability of automakers. Morgan Stanley highlighted growing competition concerns in its note: \u201cInvestors remain cautious as China\u2019s auto market has had a volatile start to the year as competition and macro uncertainties persist.\u201d […]<\/p>\n","protected":false},"author":41,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[33405,33417,33404,33409,33403,33415,33408,33411,33416,33401,33414,33412,33410,32139,33413,33402,33398,33418,33407,33400,3932,33397,33419,4754,33399,33406],"class_list":["post-59236","post","type-post","status-publish","format-standard","hentry","category-general","tag-000-hit","tag-000-vehicles-in-the-fourth-quarter","tag-000-14","tag-043-in-december-2023","tag-33403","tag-33415","tag-33408","tag-409-fully-electric-cars","tag-33416","tag-agency-began-questioning-tesla","tag-analyst-expectations-of-483","tag-byd-co-byddy","tag-delivered-526","tag-inc-tsla","tag-nearly-40-increase-from-2021","tag-new-investigation-from-regulators-in-norway-and-sweden","tag-plunged-to-28-in-the-third-quarter","tag-prices-of-its-shanghai-made-vehicles-by-up-to-6","tag-produced-more-than-3-million-new-electric-vehicles","tag-raised-safety-concerns","tag-reuters","tag-said-fitch-ratings","tag-started-the-new-year-on-the-wrong-foot","tag-tesla","tag-third-quarter-earnings-call","tag-told-reuters"],"yoast_head":"\nInvestor Concerns Rise as Tesla Slashes Prices in China: Sell or Hold? - INO.com Trader's Blog<\/title>\n<meta name=\"description\" content=\"As competition continues to heat up in China, Tesla (TSLA) announced new price cuts. Since late 2022, the automaker has been aggressively cutting prices in an effort to boost demand. However, continued price cuts resulted in a steady erosion of its profit margins, dimming investor sentiment on TSLA stock. Let\u2019s find out if investors should hold or sell their Tesla shares\u2026\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.ino.com\/blog\/2024\/01\/investor-concerns-rise-as-tesla-slashes-prices-in-china-sell-or-hold\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Investor Concerns Rise as Tesla Slashes Prices in China: Sell or Hold? - INO.com Trader's Blog\" \/>\n<meta property=\"og:description\" content=\"As competition continues to heat up in China, Tesla (TSLA) announced new price cuts. 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