Tesla Hit By Activists. Is That Why the Stock Is Near a 52-Week Low?

Tesla Hit By Activists. Is That Why the Stock Is Near a 52-Week Low?
Should You Buy Now?
 
On Tuesday, March 5, 2024, the Volcano Group (activists) took down Tesla’s power in their German plant. It’s expected to cost the company a billion in damages and prevent the plant from building 1,000 vehicles each day. The company was reconnected to the grid today (March 11), and has advised that the resumption of production will be a gradual process. 

The automaker previously paused production at the end of January for two weeks due to supply chain disruptions caused by the Red Sea attacks. These two events could reduce the 1st quarter production by 20,000 vehicles or more. However, it’s unlikely to harm sales, as Tesla has been building up inventory and shouldn’t have trouble keeping up with deliveries.
 
The bigger question is why is year-over-year revenue up only 3.0% at Tesla – one of the lowest growth on the auto stock report card. Can Tesla justify a $567 billion market cap and 41 P/E with low single-digit growth? Why did the company share price sink to just $178/share, after topping out at $299/share in July of 2023?
 
Below are the issues we’ll cover in this blog.
 
EV vs. ICE Sales Growth
China EV Exports
Price Wars
Forward Outlook: Consumer Spending
Consumer Debt + Rising Defaults on Auto Loans and Credit Cards
The Higher the Dividend, the Higher the Risk
 
And here is more information on each point.
 
EV vs. ICE Sales Growth
EVs continued their surge in the U.S. in 2023, with year-over-year sales growth of 46% and sales/leases of 1.1 million, according to Motor Intelligence. In the 4th quarter, EVs hit 8.1% market share (by volume). Tesla sold the majority of EVs in the U.S., with 654,888. (Tesla’s total sales for 2023 were 1.81 million, an increase of 38% YOY.)
 
The real story is China, however. Inside EVs is reporting that 8 million plug-in electric vehicles were sold in China in 2023, amounting to 36.5% of the country’s auto market. 21.9 million cars were sold in China in 2023.
 
Chinese EV Exports
Chinese EVs are gaining in popularity around the world. Tesla’s Model Y was the top selling auto globally in 2023, with 1.2 million in sales (source: Tesla). However, exports of Chinese vehicles surged 63.7% in 2023 (source: China Association of Automobile Manufacturers), with 4.1 million vehicles exported. This puts China in 1st for auto exports, and Japan in 2nd with 3.6 million vehicles. (840,000 of Chinese vehicle exports went to Russia. European and Japanese carmakers pulled back on their sales there due to the war in Ukraine.)

Price Wars
It seems like every day there is another EV startup, and 2023 was the first year that China exported more cars than any country in the world. BYD Co., a Chinese carmaker that is not publicly traded in the U.S., is the top selling brand in China, with ½ of the bestselling cars. Tesla’s Model Y and Model 3 are #1 and #3, respectively. BYD just lowered the price of its bestselling auto, the Yuan Plus crossover, to $16,644. GM (SAIC-GM-Wuling) is competing at the BYD price point in China with its Baojun Yep EV, with a price of just $11,900.
 

The Baojun Yep EV, starting at just $11,900, is General Motors' joint venture in China with SAIC-GM-Wuling.

That compares to the Tesla Y price of over $36,000 in China (and over $42,990 in the U.S.). China’s Nio makes luxury cars that compete directly with Tesla, Porsche and Mercedes.  
 
The price wars are happening at both ends of the price spectrum and are impacting profit margins. Many Chinese EV makers have declared bankruptcy or suspended operations, including Human Horizons and WM Motors. Lucid Motors saw its 4Q 2023 revenue decline by -39% year over year. GM and Ford have revised their plans to transition out of ICE (internal combustion engines) and into EVs, largely on concerns of profitability and the price wars. Email [email protected] if you’d like an Auto Stock Report Card.
 
Forward Outlook: Consumer Spending
Nio is projecting flat revenue and deliveries year over year for 1Q 2024. In their 4Q 2023 quarter earnings deck, Tesla admitted that “In 2024, our vehicle volume growth rate may be notably lower than the growth rate achieved in 2023.” If the April 2nd 1Q 2024 Tesla deliveries report is lower than expected, disappointed investors could continue selling. (Nio is already trading at a 5-year low.) Tesla shares have already plunged -31.4% since the Dec. 27, 2023 high of $261/share, down to $179/share today. However, Tesla’s price-earnings ratio is still very elevated at 41. Tesla’s 1Q earnings report will be released around April 19, 2024.
 
Price wars aren’t the only economic storm on the horizon. Consumer spending could become an issue, as well. The American consumer has been resilient amid the headwinds of inflation. However, the personal savings rate* is at an historic low and defaults on credit cards and auto loans have started to creep up.
 
* The percentage of people's incomes left after they pay taxes and spend money.

Consumer Debt + Rising Defaults on Auto Loans and Credit Cards
U.S. household debt hit another all-time high of $17.5 trillion in the 4th quarter of December of 2023. “Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,” said Wilbert van der Klaauw, economic research advisor at the New York Fed. “This signals increased financial stress, especially among younger and lower-income households.”

Auto loan delinquencies are still quite low, at just 2.66%, and the U.S. may avert a recession in 2024. However, it’s important to remember that carmakers struggle in slow economic and recessionary times. General Motors and Chrysler declared bankruptcy in 2009. However, the companies’ troubles began years before the Great Recession.  
 
The Higher the Dividend, the Higher the Risk
At today’s valuations, Tesla’s debt/equity ratio is just 0.08. By comparison, GM and Ford still have very elevated debt levels and D/E ratios, at 1.89 and 3.49, respectively. Tesla, like many growth companies, doesn’t pay a dividend. GM and Ford, like many legacy brands, do, with 1.22% and 4.83% yields, respectively. In today’s world, it’s very important to understand credit risk, and to note that much of the time, the higher the dividend, the higher the risk of losing principal.
 
Bottom Line
Autos don’t do well in slow economic or recessionary times. While electric vehicles remain the most exciting growth area of the automakers, the price wars and plethora of startups have complicated the opportunity for investors. Tesla’s high price, even with the 2024 pullback, could invite more profit-taking and selling, particularly if next month’s delivery and earnings reports are lower than expected.
 
The heated competition in China, combined with Chinese equities being out of favor with U.S. investors, have drug the share prices of many former meme stock darlings, such as Nio and Xpeng, to 5-year lows. While the valuation and price of Nio is attractive and their cars are receiving great reviews – Nio cars have won awards in Germany, Sweden and Norway – the economic headwinds and competition could continue to weigh on the potential returns of all Chinese EVs. 


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