With Tesla’s (NASDAQ:TSLA) electric vehicles rapidly losing market share in both the U.S. and China, the automaker’s near- to medium-term outlook is fairly dismal. What’s more, the valuation of Tesla stock remains quite elevated, while the company’s second-quarter deliveries are widely expected to come in well below the Street’s official average estimates. In light of these strong, negative catalysts, I expect the automaker’s shares to perform quite poorly.
On the other hand, Tesla does have multiple, powerful, potentially longer-term positive catalysts, along with two medium-term possible upbeat drivers. Still, I am uncertain about the extent to which the company will be able to benefit from these catalysts. I continue to believe the legal troubles facing Tesla CEO Elon Musk could catch up to him at some point. Given all of these negative issues, I advise investors to sell Tesla stock.
Market Share Losses and a Likely Q2 Miss
In Q1, Tesla’s share of the U.S. EV market sank to 51.3% last quarter. That is way down from the 61.7% of the sector that it controlled in Q1 of 2023. The story is similarly dismal in China, where its share of the Asian country’s EV market tumbled to 6.7% in Q4 of 2023 from 10.5% in Q1 of that year, according to Bloomberg.
Meanwhile, the automaker’s Q2 global deliveries are expected to fall significantly year-over-year. They will meaningfully fall short of the Street’s official average estimate. Specifically, Wells Fargo recently predicts Tesla will deliver less than 400,000 EVs this quarter. That is well below analysts’ official mean estimate of 450,000. In Q2 of 2023, Tesla delivered 466,000 EVs.
Similarly, “an independent Tesla researcher” using various data points to estimate deliveries suggests it will hand over just 416,000 EVs this quarter, Barron’s reported.
In my view, multiple factors are causing the downturn in the automaker’s deliveries and market share. Among these catalysts are increased competition, questions about Tesla EV’s reliability and Musk’s controversial political stances. Additionally, probably primarily due to the latter factor, the U.S. media’s coverage of Tesla in recent months has been quite negative. None of these trends is likely to ease anytime soon.
In spite of these negative issues, the valuation of Tesla stock remains extremely high for an automaker. Specifically, the shares are changing hands at a forward price-to-earnings ratio of 73.5 times. Conversely, General Motors (NYSE:GM) and Ford (NYSE:F) have P/E ratios of five and six, respectively.
Potential Positive Catalysts and Legal Issues
In the medium term, Tesla could get a boost from deploying its full self-driving (FSD) service in China and rising deliveries of its Cybertruck. On June 10, the automaker disclosed it agreed to use Chinese tech giant Baidu‘s (NASDAQ:BIDU) mapping software. According to CNN, the deal moves Tesla closer to providing its FSD service in China for the first time. Since Tesla charges a subscription fee for FSD and the feature is considered desirable, offering the service in China could meaningfully boost Tesla’s top and bottom lines within the next year.
In May, Tesla reportedly delivered almost 3,000 Cybertrucks, whose average price is over $100,000. If deliveries of the Cybertruck increase tremendously later in the year, they could move the needle for Tesla’s financial results.
Over the longer term, Musk may have to resign as CEO of Tesla. That’s because the Department of Justice is reportedly examining his statements as part of its probe into whether the company committed securities fraud. Former Nikola (NASDAQ:NKLA) CEO Trevor Milton was sentenced to four years of prison after being found guilty of wire fraud and securities fraud after lying to investors.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
