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Why did the Tesla share price drop last week?

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Tesla
Image source: Tesla

The Tesla (NASDAQ:TSLA) share price took quite a tumble last week, falling by almost 10%. The electric vehicle manufacturing side of the business is starting to experience some growing pains that appear to be sparking investor concerns. But it’s worth noting that the stock is still up by nearly 270% over the last 12 months. So what happened? And is this a buying opportunity for my portfolio?

The falling Tesla share price

There’s a growing level of uncertainty surrounding Tesla’s presence in China. The Chinese government and media have had their sights locked on Tesla for a while regarding its data gathering practices. And it would appear the negative press is having a tangible impact.

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According to the China Passenger Car Association, Tesla has sold 25,845 electric vehicles in April this year. This was actually a 27% decline versus the 35,478 cars sold in March. Meanwhile, some of its top Chinese competitors, such as NIO and XPeng, saw their vehicle delivery numbers rise, albeit by a small margin.

Tesla has so far not commented on these latest figures. But it did recently cancel its plans to purchase additional land next to its Shanghai manufacturing facility. While I can only speculate, this move may signify that the management team doesn’t believe the future growth of vehicle sales in China is as large as initially anticipated.

Given that around 40% of Tesla’s 2022 revenue is expected to originate from Chinese markets, I’m not surprised to see the share price take a hit.

Taking a step back

This is all undoubtedly troubling news. But I think investors may have overreacted. While Chinese vehicle sales declined, the company appears to have mitigated the impact by exporting 14,174 cars to Europe.

What’s more, the cancelled land expansion of the Shanghai facility shouldn’t impose any limitations on Tesla’s ability to grow its production capabilities. After all, it can still assemble up to 500,000 vehicles per year. And even if Chinese sales continue to decline, the rising popularity of the Tesla brand within Europe could result in greater export figures to help maintain its projected growth. At least, that’s what I think. And if I’m right, then I believe the Tesla share price may start to climb again over the long term.

The Tesla share price has its risks

The bottom line

Looking at its first-quarter earnings report, the company overall seems to be progressing rather well. Revenue from vehicle sales climbed 78% year-on-year to $8.7bn. And its income from operations more than doubled from $283m to $594m over the same period of time.

Needless to say, this is some impressive growth. However, I still won’t be adding this business to my portfolio simply because of its valuation. Based on the current Tesla share price, the firm’s market capitalisation stands at around $570bn. That’s a price-to-earnings ratio of nearly 600!

The growth potential for Tesla’s business appears to be substantial when considering its other operations, such as its solar energy and battery divisions. However, personally, I think there are far cheaper opportunities for similar growth elsewhere.

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Zaven Boyrazian does not own shares in Tesla. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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