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Will Trade War and Controversies Thwart Tesla's Growth?

Zacks Equity Research

The young and flamboyant face of Tesla has dulled lately. The northward movement of its growth has been obstructed by both external and internal factors. The nagging U.S.-China trade war and rising tariffs are hampering Tesla’s profits from international markets. What’s more, the frequent controversial tweets by its CEO have made Tesla’ share price volatile.

Will it now be possible for the magnificent electronic car maker to reap profits given that its peers are catching up fast?

Impact of U.S.-Sino Trade War

The electric car maker has captured a sweet spot in the Chinese market. In fact, China is the biggest international market for Tesla, Inc. TSLA. In the second quarter of 2019, Tesla recorded $1.5 billion in sales from China. With strong sales of its Model 3, Model X and Model S in the third quarter, the Chinese government has granted a 10% purchase tax reduction to the company, exclusively.

As a result of the trade war, China has imposed 25% tariffs on U.S. auto imports from Dec 15 which would increase the cost for Tesla. But with the 10% discount, Tesla can avoid concerns of a price rise. However, two things will constantly bother Tesla in this respect.

The electric car maker will have to be diligent enough to stoke up consumer demand to beat competitors. But most importantly, it must prepare itself for worse. If 25% tariffs are imposed with the existing duties on auto imports, imported autos in China will cost 50% more after Dec 15. Now, the fate of Tesla depends on the U.S.-China high-level talks. If the trade war escalates, the company will be exposed to tariffs and the Chinese government can easily retract the purchase tax reduction.

In the present scenario, Tesla is already highly priced in China and any tariff-induced rise could hurt its sales. However, Tesla is working hard on running its Shanghai-based manufacturing plant as soon as possible.

Tesla, Musk and Controversies

Coming to controversies, both Tesla and its CEO Elon Musk are in the spotlight. Last year, the owner of Tesla and SpaceX landed in controversies with the U.S. Securities and Exchange Commission (SEC) and the National Highway Traffic Safety Administration (NHTSA).

In August 2018, Musk’s tweet “am considering taking Tesla private at $420. Funding secured” dragged Tesla to court. Later, per a court judgment, Musk agreed to submit public statements about Tesla’s finances vetted by its legal counsel. The deal with the SEC also included a damaging cost and Musk had to step down from the position of Tesla’s chairman.

Further, in September last year, Tesla had claimed its cars to be the “safest” and said that its Model S has a 5.4-star rating. As per NHTSA, the car did get five star rating in all categories but cannot be claimed as the safest car and Tesla has been misleading its customer.

Another comment made by Musk in 2018 recently haunted him. Musk, in a tweet, had called Vernon Unsworth, a diver who rescued young soccer players stuck in Thailand’s underwater cave a “pedo guy” and referred to him as a “child rapist.” There was a rift between them since Unsworth criticized Musk’s rescue plan with a submarine. In September 2018, Unsworth sued for defamation and the tussle is going on.

These distorted information and tweets by Tesla’s CEO had led to huge volatility in the stock price. Neither the tweet on privatizing the company nor safety-related comments could be ignored.

Tesla has been growing for a long time in spite of critics calling it as a money-losing venture. Though it has provided good returns to bears and short-sellers, Tesla has not posted profits in the last few years. In fact, the company’s shares have declined 26.5% on a year-to-date basis in contrast the S&P 500’s rise of 17.2%.

Tesla’s controversies are shifting attention away from its fundamentals. The company has gained a lot of attention in the overseas market and dominates the electric vehicle market. In fact, other established automakers like Ford Motor Company F, General Motors Company GM, NIO Inc. NIO and Volkswagen AG VWAGY are closing following it and catching up pace in electrifying their vehicles.

Volvo’s Polestar 2 model is lately giving tough competition to Tesla’s Model 3 by following some of Tesla’s strategies. However, Tesla’s software and battery capabilities give it an edge over its competitors. Unfortunately, Tesla’s frequent controversies are distracting and disrupting its image.

Tesla currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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