Telsa shares have been hammered during the past 12 months declining about 66% (see chart). There are several reasons for the drop in the share price, including supply chain disruptions and the decrease in the broader technology markets. In its Q2 fiscal quarter in July 2022, Tesla delivered nearly 18% fewer electric vehicles as Chinese-related Covid-19 shutdowns disrupted Tesla’s production and supply chain distribution. Chinese lived with a zero-Covid policy until December 2022, which impacted supplier facilities within the country.
Tesla’s plans during the year in China were disrupted by Covid-19 and the Government’s policy toward the virus. In December 2022, the Chinese Government reversed its zero-Covid policy and is now moving forward with a “living with Covid” policy which should help Telsa get back on course regarding production increases. Supply chains could eventually ease if workers can return to factories and work in an environment that does not create a wave of the spread of the virus. China has been critical to the market lead Tesla has in the electric vehicle arena. The country has provided low-cost production and, in 2021, produced about half the company cars.
Tesla Pulled Back Their Workforce
The lack of production was evident to Chief Executive Officer Elon Musk. In June, he decided that the production levels would be met with a decline in demand as the economic contraction began. He said in June 2022 that Tesla needed to cut about 10% of its workforce.
There Have Been Bumps in the Road
In November, Tesla announced that the company recalled more than 80,000 electric vehicles in China due to software and seatbelt issues. Most of the recalls were the model S and model X, which had issues related to the software. Tesla also recalled about 3,000 imported Model 3 vehicles due to faulty seatbelts. The fallout of the recalls will be essential to evaluate. China is one of Tesla’s most influential markets. The company has a significant production factory in Shanghai and has sold record numbers of automobiles.
Record Sales from Chinese Factories
Production in China is also significant for Tesla. In September, Tesla sold more than 83,000 Chinese-made vehicles hitting a new record for sales in a month. Globally, during September, Tesla delivered more than 340,000 electric cars in Q3, which was also a record. Unfortunately, the delivery expectations were even higher, putting downward pressure on the stock price (see chart).
To enhance sales in China, the Shanghai factory suspended deliveries as the plant halted production for an upgrade which was expected to increase production to 22,000 units per week, up from 17,000.
Rising Covid Waves Continue to Generate Interruptions
By the end of the year, despite record sales, the production of Tesla in China was still inconsistent. The suspension of production came amid a rising wave of Covid after China decided to ease its Zero Covid policy.
For most of the prior two years, China had been living under a mandate of a Zero-Covid policy enforced by the Chinese Government. Xi Jinping, the Chinese decided on a zero-covid approach expecting to bring China back to economic greatness. The decision came in the wake of the Chinese winter Olympics showcasing the zero-COVID policy’s success by creating a bubble that kept the virus at bay. It is clear that it is a lot easier to handle the Olympics for two weeks than the entire Chinese population over an extended period.
In 2022, unprecedented waves of infections have swept through the country. The zero-COVID policy was not working, and economic stagnation was occurring because of the policy’s limitations. There were periods when workers at Tesla’s factory could not come to work due to Covid restrictions.
New Variants Generated Lockdowns
The Zero-covid policy kicked into gear in March 2022, as the Omicron variant swept through Shanghai despite the zero-COVID policy. Shanghai was locked down for two months and became a symbol of the failure of the zero-COVID policy. The economic costs were severe. The lockdown hit GDP, which contracted by 2.6% in the June quarter.
Their policy continued to fail, and during October 2022, the Government reported thousands of new Omicron cases daily. During the opening of the new party Congress, Xi gave a speech boasting about the communist party’s COVID policy.
Refusal to Use Western Vaccines
One of the biggest hurdles to the supply chain disruptions has been that Chinese leader Xi Jinping is unwilling to accept western vaccines. Despite Covid waves creating infections that are reaching all-time highs, China is loosening testing and quarantine rules. The zero covid policy triggered an economic contraction and public unrest. Xi is unwilling to take a better vaccine from the west despite the fact that the vaccines created in China do not work against Omicron.
China has not approved any foreign Covid vaccines for its people, instead approving domestically developed vaccines that are less effective than foreign ones. China has not asked the United States for a Covid vaccine, despite the effectiveness of both mRNA vaccines that Moderna and Pfizer have developed. Both of these vaccines have also been altered to handle the Omicron variant. The upshot is that this situation is a point of national pride, and the Government would rather have its people get sick than use a foreign vaccine.
What Has Happened to Telsa Shares?
Tesla shares are now back to levels not seen since 2020 (see chart). The CFD trading of Tesla has declined for several factors, including its inability to keep up with analysts’ expectations of sales and profits. Tesla is part of the Nasdaq, which tumbled in 2022, declining by 32.5%.
Most of the drop in the price of the broader Nasdaq was due to the change in investor sentiment following massive rate hikes by the U.S. Federal Reserve. In 2022, the Federal Reserve reduced interest rates by 4.25% from zero, putting downward pressure on stock prices. Since stock prices are the future value of discounted cash flows, higher interest rates will negatively impact the price of a stock. The Federal Reserve has been steadfast in its commentary that it plans to fight inflation and is willing to allow the U.S. economy to fall into recession to ensure inflation declines and does not get out of control.
While Tesla has experienced a sharp decline (see chart), it has normalized its price to forward earnings to 24. The company had a PE ratio of 33 in early January 2023 and a PE ratio of 966 in 2020. The question for investors is whether Tesla is a car company and should have multiple equivalents to other car companies or if Tesla is a technology company. If Telsa is considered a car company, then the forward price-to-earnings ratio could fall to levels where Ford, a competitor, is the price thathas a forward price-to-earnings ratio close to 7.
Some people might even believe that Tesla is the one way for an investor to access a company Elon Musk. Musk is considered a genius in many circles, and companies like SpaceX are private and don’t provide access to most investors.
The selloff in Tesla stock price might present opportunities. The weekly relative strength index (RSI), a momentum oscillator that measures overbought and oversold levels, is printing a reading below 30, considered oversold.
The Bottom Line
What is clear is that Tesla is attempting to increase production in China but is willing to expand to other areas if waves of Covid continue. Tesla applied with the Texas Department of Licensing to expand its Gigafactory in Texas and invest about 776 million. The plan is to increase the factory size by 5.6 million square feet.
The issue that Tesla faces in China now that the Government has reversed its zero-Covid policy is that the country is likely to face waves of infection due to the Omicron variant. China is unwilling to use foreign-made vaccines, and despite having a plethora of their vaccines, none are effective against the Omicron virus.
Sales in China were robust in Q2 and Q3, and despite record production, Tesla has not lived up to analyst estimates. In early January, Telasa slashed car prices in China in a bid to boost demand. The price cuts have led to longer waiting times for potential buyers as production continues to trail.
The question for investors is how to value Tesla. The forward price to earnings has settled back to earth after hitting levels near 900 in 2020. Despite a forward price-to-earnings figure near 24, other car manufacturers like Ford, who also produces electric vehicles, are closer to a seven forward price-to-earnings mark. The upshot is that the price of Tesla has declined sharply, falling about 66% for the year, and is now oversold, making it an attractive stock candidate.