To The Moon

As the United States and large swathes of the Western Hemisphere rolled forward into a new year with a recession being deemed as being very likely, Tesla’s stock ($Tesla Motors(TSLA)$ ) – despite substantive exposure in the resurgent Eastern Hemisphere – quietly gathered an increasingly bearish forward view among industry watchers and analysts.

The broad reasoning behind this is an object lesson in timing and perspective.

The Big Picture

New vehicle sales in the U.S. have been in a steady decline for nearly a decade now, with 2022 being the lowest since 2011. With estimates at around 13.7-13.9 million, this metric represents an 8-9% decline from the previous year. However, electric vehicles accounted for 5.8% of all new cars sold, representing a solid increase from the 3.1% share in the previous year.

However, it bears to keep in mind that China and Europe have collectively represented the majority of EV sales in the world for well over 5 years now – with the former being a massive market.

The Chinese government’s newspaper of record confirmed on the 15th of March – backed by data from both global EV sales trackers and domestic associations – that EVs accounted for 19% and 11% of all car sales in China and Europe respectively. 5.2 million Battery Electric Vehicles (BEVs) were sold in China while 807,180 EVs were sold in the U.S.

The landscape that dogs Tesla in its native homeland of America is the advent of an increasing range of new and entrenched entrants: Mercedes-Benz, BMW ($Bayerische Motoren Werke AG(BMWYY)$ ), Ford ( $Ford(F)$ ), Cadillac, Hyundai, Kia and Nissan – among others – launched their EVs in the U.S. in the previous year and have been eating into the company’s market share, which dropped from 72% in 2021 to 65% in 2022. China displays a similar but a much vaster landscape: more than 94 brands collectively offer over 300 models – ranging from just $5,000 to over $90,000 – with local brands commanding 81% of the EV market. Tesla held an approximate 14% market share here in 2022 which slipped to the 8.8% mark in 2022.

Of enormous interest are commercial vehicles, which tend to be used much more intensively than passenger cars. Electric commercial vehicles are expected to show a 80% year-on-year increase to nearly 600,000.

China is also expected to remain the leading market here, accounting for nearly twice as many sales as compared to Europe. South Korea is expected to have 25% of the total market share while the U.S. is being projected to potentially be a breakout riser this year, owing to strong fleet demand in its massive logistical network. Here too, Tesla has stiff competition: GM’s BrightDrop, Volvo Truck and Daimler Truck have registered large buy orders.

A crucial factor that supports widespread BEV adoption would be charging infrastructure. In terms of charging infrastructure – both slow and fast – the U.S. is far behind China as well as Europe:

China has a unique advantage in terms of reach: more than 900 million people live in urban areas. With the enforcement of a single standard for charging plugs, heavy state support in building charging networks and subsidies for purchases, over 75% of China’s EV sales have been BEVs in 2022.

Outside of the East and West Coasts, large parts of the U.S. are quite light in terms of charging infrastructure density.

China has nearly 1.8 million chargers installed. Guangdong Province alone has 383,000 – more than double the number of public chargers in the entire United States.

The relative lightness of coverage in the United States is an impediment towards accelerated BEV adoption for all BEV sellers and not just Tesla. As the competition gets more crowded, Tesla’s ground-breaking, industry-leading “first mover” advantage in its home turf is being eroded.

Ratio Trends: Q4 2022 Till Present

For a sense of how Tesla’s stock is perceived, let’s now consider the evolution of two price ratios: the Price to Earnings (PE) and Price to Sales (PS) since Q4 of last year till the present.

In virtually every major region of operation for the company – the U.S., China and Europe – the overall outlook for new vehicle sales (at least for BEVs) is generally bullish, with China leading the pack. However, the company’s stock performance (measured in terms of these ratios) exhibits a gentle decline since a brief period of bullishness in February.

There is some credence to this bearish outlook. For instance, industry observers largely agree that a limited product mix, increasing costs, competition from more affordable options, and domestic sentiment have been hindering its efforts to ramp up its position in China. Steadily rising competition in its home turf – including by well-established carmakers from Europe and Japan – threatens to chip away its massively dominant position. Large-scale recalls due to faults in the self-driving software are threatened with the possibility with compounding as U.S. regulators begin investigations into faults in the steering wheel. With greater lead times in deliveries comes the possibility of prospective customers simply switching to a whole host of alternative with varying value propositions.

Key Takeaways

It would be highly improbable that Tesla would lose all vestiges of its commanding market presence over the course of a single year. Newer models will be launched and deeper service offerings will be brought into place for the company to remain in the picture. In its home turf or anywhere else, it’s simply inconceivable that it will remain the only feasible choice for consumers. Thus, the company’s stock cannot be expected to maintain the high PE Ratio it continues to show, given that the average PE Ratio for the Domestic Automotive Industry lies at around the 11-12X mark. Thus, further stock price rationalization cannot be ruled out.

For investors, it wouldn’t hurt to diversify sector exposure with other tickers and names for consideration. The high conviction the stock had traditionally enjoyed, however, could possibly make the forward-going trajectory a rocky one presenting a variety of opportunities for the tactical investors. For sophisticated investors, the likes of the Tesla 3X Long ETP ($LEVSHARES 3X TESLA ETP(TSL3.UK)$ ) and Tesla 3X Short ETP ($-3X TSLA(TS3S.UK)$ ) provide simple one-click solutions to capitalizing on short-term opportunities on the upside and downside respectively. In addition, as an earlier article had outlined, these ETPs are uniquely priced to be extremely competitive against the likes of other forms of structured services that they compete with.

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