Tesla Fell 3.7% on China Price Cuts News: Should Investors Be Concerned?
Source: Tiger Brokers, Bloomberg, 14 Jan 2024
Tesla( $Tesla Motors(TSLA)$ ) stock price declined by 3.67% on Friday following the company's decision to reduce prices in China.
Model 3 sedan is now 5.9% cheaper at 245,900 yuan in China, while the Model Y SUV is was lowered by 2.8 per cent to 258,900 yuan from 266,400 yuan.
The China price cut highlights intense competition in the Chinese EV market, suggesting a potentially slow and uneven economic recovery in China for 2024.
This decrease also signifies a further slip in Tesla's profit margin, disappointing investors who believed the shrinking margin had come to an end.
We see more price cut ahead and hence more hits to its already-shrinking profitability.
While Tesla's AI-powered Optimus has the potential to boost share prices, it is not expected to launch until 2027.
Year-to-date, Tesla fell 11.91%, contrasting with a +101.72% return in 2023.
The 11.91% drop since the beginning of January is the most significant since 2016 when the stock fell by 14% over the first nine trading days in 2016.
According to Bloomberg consensus, Tesla's 12-month target price is USD 246.37, indicating a 12.6% upside based on Friday's closing price of USD 218.89.
Looking ahead, there are increased risks for Tesla in 2024 due to a lower profit margin outlook, potential decreases in deliveries, and the possibility of a higher tax rate.
Despite these risks, we maintain a long-term bullish outlook on Tesla due to the anticipated Next Generation Platform (expected in 2025), a potential resurgence in gasoline prices driving EV adoption, better-than-expected execution on earnings targets, the potential rollout of a revamped Model Y, and multiples expansion (PE expansion) prospects given the rate cut outlook.
The current share price of USD 218.89 is still 46% lower than its all-time high of USD 409.97 in 2021. The trailing twelve-month Operating Income stands at USD 10.7B, marking a 66% increase from the USD 6.4B recorded in 2021. Considering the PE ratio is now 70x compared to 399x in Nov 2021, we perceive the valuation for Tesla as currently undemanding.
Investment Strategies worth considering:
1) Buy deep in-the-money Tesla Leap calls. For example, buy Tesla Call option with a strike price of $130 with an expiration date of 25 Jan 2025. Delta is 0.906.
Pros: Delta is near 1, its profit and loss profile is similar to actual stock ownership, and the maximum loss is limited to the premium paid. Cons: LEAPS are typically more costly.
2) Gradually invest in Tesla stock.
3) Dollar-cost averaging: Set up an auto-invest plan to invest a fixed smaller dollar amount in Tesla at regular intervals.
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