Here’s How Tesla Can Change Its Narrative
Tesla’s (NASDAQ:TSLA) stock had a volatile 2018, with Elon Musk & Co facing difficulty in the ramp-up of Model 3. With the production rate of Tesla’s Model 3 stabilizing close to 5,000 per week (at 4,723), most of the extreme bearish forecast about Tesla has been proven wrong. Most.
Already, 2019 is shaping up to be Elon Musk’s most important year, with TSLA shares swinging violently on any bit of good or bad news. For the year so far, TSLA stock is down 2.5%. On the one hand, shares of the electric vehicle maker initially spiked to begin the new year, as Tesla announced its fourth-quarter production grew to 86,555 — an all-time high — and that it plans to sell Model 3 in China and Europe.
On the other hand, TSLA received a 13% haircut when the EV-maker announced it would cut 7% of its workforce. The selloff was considered a buying opportunity by many.
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One of the more prevalent bearish arguments, however, is that new competitors will be launching their electric models while Tesla will need to deliver profits and margin growth to improve bullish sentiment.
Remember, Tesla is a speculative story, and it needs a narrative to flow in its favor. It’s got its work cut out for it, but there are plenty of broader trends and specific strategies Tesla can take to put its story in a more positive light …
Way forward for Waymo and Self-Driving
Self-driving and ability to have its own private transportation fleet has been one of the reasons why investors are optimistic about Tesla stock …
In 2018, we saw a major reversal when one of the Uber’s autonomous vehicles was involved in a fatal accident. Despite this setback, Alphabet’s Waymo has plowed ahead. It has started Waymo One, the first commercial self-driving ride-hailing option in the Phoenix metro area.
Throughout 2019, all eyes will be on how this fleet performs and if there are any mishaps. If Waymo One is able to operate without any major incidence, it will help improve the sentiment for Tesla’s self-driving technology. A recent report by UBS mentioned that Waymo could book a staggering $114 billion in revenue in 2030. Obviously, if Waymo is able to show decent acceptance of its self-driving fleet, we should see similar bullishness for Tesla.
In the case of Tesla, having a better autopilot option will help the company differentiate itself from other competitors. Most of the competitors would have to rely on other vendors to provide autopilot capabilities in their cars. Tesla’s “software first” approach should help the company maintain a decent competitive edge in self-driving.
Eventually, we should see a maximum of three or four major self-driving alternatives. Heavy regulation in this space would also create a major barrier to entry for newcomers. Tesla will play a big role in the self-driving ecosystem which should certainly improve the pricing power of its models and also provide an option to have its own self-driving fleet.
Breaking Ground in China
Tesla needs to have a good market share in the rapidly growing EV market of China. The new factory in Shanghai is expected to start production for Model 3 by end of the year. Local production in China would reduce the tariffs and cost of production for Tesla. It will also reduce any impact due to future trade tensions between the U.S. and China.
In the initial phase, Tesla is expecting to produce 3,000 Model 3 per week. This would eventually be ramped up to 500,000 vehicles per year. Subsidies for electric vehicle have been reduced in China. However, there is a strong pent-up demand in most of the major cities for complete transformation to electric vehicles.
Tesla’s brand strength and local production should help the company gain a big share of this market …
Where Is the Competition
2019 would be an ideal year to see the strength of Tesla’s brand against other automakers. Audi’s e-tron and Hyundai’s Kona are some of the frontrunners that are cited in the EV market. Jaguar’s I-Pace has also done a good job by giving great specs with attractive design. Tesla would need to compete against all these newcomers and be able to maintain its loyalty among customers who want to shift to an EV.
We could likely see some of the impacts on deliveries for TSLA in the first half of 2019. The opening of Model 3 reservations for Europe will also provide a clear picture of the demand for these cars at the new price point.
Tesla has recently reduced the prices which are taken as a clear sign of a lack of demand by bears. However, we need to note that the reduction in prices is not very big and it was done around the time when federal subsidies will get lowered. Wall Street seems to be overreacting to every little news from Tesla.
Unless we see some strong sign of demand shift to newer competitors, there shouldn’t be a need to worry about the stock. We should also note that Tesla has undergone a massive change in 2018 as the production ramp-up of Model 3 has been largely successful. Despite this, the stock has experienced a near-3% decline in 2019. This means that the next growth momentum would only be possible when Tesla shows its performance against other EV competitors.
Tesla has a number of advantages in terms of EV leadership, branding, software-first car, competitive autopilot option and more. The company and its leadership have also learned some valuable lessons with the difficult ramp up of Model 3. This should make future product launches easier and more predictable. I believe that unless the competition is able to completely overthrow Tesla, the stock should maintain bullish sentiment through 2019.
Investor Takeaway
After a roller coaster 2018, 2019 will be an important year for Tesla stock holders …
As the self-driving option becomes more popular and acceptable among the regulators and customers, we should see better valuation for Tesla’s own autopilot capability. Tesla has also broken ground in its Shanghai factory. If the timeline for production is close to current estimates, it will improve the outlook of Tesla models in China.
Investors should also keep a close eye on the performance of the competition. Some of the biggest names will be launching EV models which can directly compete with Tesla. The last thing that Tesla needs is to lower its prices. The bullish sentiment for Tesla’s stock will improve significantly if we do not see any major price revisions from Tesla in the next few quarters. Despite all the shenanigans in 2018, the long-term bullish case for Tesla is still strong.
As of this writing, Rohit Chhatwal did not hold a position in any of the aforementioned securities.
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