Since the start of the year, the Tesla (NASDAQ:TSLA) share price has fallen by 28%, due to a combination of lower car sales, operational disruption, and analysts reducing price targets.
The real question for Tesla investors though, is what the long-term picture looks like. Sometimes, a temporary drop in a stock – or even the underlying business – can be a buying opportunity.
Lower sales
The company’s earnings report in January revealed weakness in sales prices. And news from China indicates that Tesla’s sales are continuing to fall in one of its most important end markets.
In February, Tesla sold 60,365 cars produced in its Shanghai gigafactory. That’s down from the 71,447 sold in January and 19% lower than February 2022.
Part of that is attributable to the Lunar New Year falling in February this year, rather than January. Importantly, rival BYD also reported a 36% year-on-year decline.
That indicates to me that there’s something more going on other than Tesla struggling with excess production. And I view that positively – cyclical challenges are likely to come and go over time.
Production issues
Tesla’s gigafactory in Berlin has also been affected by an arson attack that left the plant without power. The damages are estimated to be close to $1bn.
There’s a case for thinking this might not be a big deal. A limited output might help boost margins and reduce the need for discounting.
I don’t think things are quite so straightforward. Having as many cars on the road is an important source of data for Tesla’s autonomous driving projects.
The setback might therefore be a serious one. And it led to the share price falling earlier this week.
Cyclical challenges
In my view, the main issue with Tesla at the moment is that it’s a company that’s more cyclical than most and it’s in the wrong part of the economic cycle. At the business level, that’s about it.
The trouble is, the stock hasn’t been priced like a cyclical company that’s about to enter a temporary downturn. It’s looked more like a business that’s going to grow rapidly and quickly.
Analysts had been expecting Tesla to sell more cars, increase its revenues, and grow its earnings. But that hasn’t been happening lately, so price targets have come down and the stock has fallen.
So the stock was overpriced at the start of the year due to expectations that Tesla – unlike other car companies – would be immune to cyclical shifts. But what about now?
Buy the dip?
Let’s be clear about one thing – Tesla is more than a car company. It might look like one, but it has an impressive technological edge in a number of potentially important ventures.
Arguably, the most important thing about the company is its culture. The firm has innovation in its DNA and this could be hugely important as the macroeconomic environment starts to improve.
However, the fact the Tesla share price has come down a lot, doesn’t mean it’s undervalued. It’s cheaper than it was, but I don’t think it’s arrived at value territory yet.
