While the market is partying its way back to all time highs — the NASDAQ-100 is actually at new all time highs — Tesla Inc (NASDAQ:TSLA) stock is being left in the dust.
Tesla stock rebounded hard from an early February correction that was inspired by inflation concerns. The stock bounced off a $310 low and soared to nearly $360 by the end of the month.
But Tesla stock hasn’t fared so well against trade war fears. For the most part, markets dropped on news of hefty tariffs on aluminum and steel imports. But markets have largely rebounded since, as the tariffs seem largely isolated and singular in scope.
Tesla stock? Not so much. It’s still dropping.
Steel and aluminum tariffs are widely considered to be most negative for automakers in the United States, who use a ton of both metals in production. Moreover, U.S. car sales are starting to fall off for the first time in a decade, thanks to rising interest rates. Then there is the whole ride-sharing headwind, as wide-spread access to services like Uber and Lyft are lessening the need to own a car for urban residents.
Tesla stock is no exception.
And it’s actually been especially bad for Tesla shares. Rumors are starting to pop up that Model 3 production ramp is happening at a much slower rate than projected. We all know that Tesla stock trades with production and delivery numbers. If those are weak next quarter, Tesla stock could drop.
What’s the move on TSLA stock? Depends on your time frame. Here’s why.
Short Term Pain, Long Term Gain
If you are looking to make a quick buck over the next 3-6 months or don’t have the patience to wait in an investment for a long time, then Tesla is not the place to put your money right now.
The company is staring at some serious headwinds over the next 3-6 months. Tariffs will push up material costs for the company, thereby either squeezing margins or forcing Tesla to raise the price of its vehicles.
But not all of this trade war stuff is bad for Tesla. Tesla’s Chief Executive Officer and President Donald Trump have exchanged tweets about a potential “mirror tax”, wherein the U.S. would impose the same import duty on a foreign country that it imposes on the U.S. That would be a game-changer for Tesla, since China’s import duty is currently 10-fold that of the United States’ import duty. Consequently, a mirror tax should shield against cheap, foreign competition and, if China decides to lower its import duty in response, help Tesla grow international market share.
Overall, though, any pricing tailwind achieved from the mirror tax should be largely or entirely offset by pricing headwinds from the steel and aluminum tariffs. Thus, so long as tariff headwinds hang over Tesla stock, investor demand will likely remain depressed.
More importantly, it looks like CEO Elon Musk and company have, once again, overshot production estimates. At the end of 2017, Musk was calling for Model 3 production to hit 2,500 vehicles per week by the end of the first quarter. We are now past the end of Q1 and, according to multiple sources, Model 3 production is well short of that target.
Most notably, Bloomberg’s Model 3 production tracker estimates that weekly production maxed out at under 1,000 vehicles per week in mid-February. Today, Tesla is producing only 655 Model 3 vehicles per week.
Again, so long as Model 3 production remains below par, investor demand for Tesla stock will likely remain depressed.
In the near-term, then, there are multiple things (tariffs and sub-par Model 3 production) that will keep investor demand depressed. But tariffs will likely move into the rear-view mirror over the next 12 months. And Model 3 production is ramping, just not at the pace management expected. Longer term, Model 3 production ramp will inevitably hit management’s 5,000 weekly production target.
At that point in time, Tesla stock will surge higher. As I’ve pointed out before, production ramps are the catalyst which drive huge rallies in Tesla stock. Consequently, Model 3 production ramp will likely drive a huge rally in Tesla stock towards the back end of 2018, as weekly production numbers hit their 2,500 and 5,000 targets. I’m sticking by my forward 12 month price target of $450 (see the math here).
Bottom Line on TSLA Stock
If you’re looking to make a quick buck, move on to another name.
If you’re a long term investor, the lower $300’s looks like a good price to start accumulating for the long haul.
As of this writing, Luke Lango was long TSLA.
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