Tesla, Inc. (NASDAQ:TSLA) stock has recovered remarkably from its May/June lows, riding on the market recovery as tech and growth stocks have likely bottomed. But, it doesn’t mean that we think TSLA has bottomed out decisively.
We urged investors to be cautious about adding more exposure in our previous article, as we believe TSLA could underperform significantly in the medium term. While we think Tesla should be able to stage a recovery in its production cadence and profitability in H2’22, we need to remind investors to adjust their expectations for market outperformance, given slower growth estimates ahead.
Our valuation model suggests significant caution, despite improving growth momentum in H2, as we believe the near-term upside has been reflected. Furthermore, our price action analysis indicates that a lower high top could form at a critical juncture in TSLA’s medium-term chart, offering a fantastic opportunity to cut exposure.
Therefore, we revise our rating on TSLA from Hold to Sell and urge investors to layer out into other well-beaten-down growth and tech stocks.
Tesla’s Slowing Production Growth Doesn’t Bode Well
Tesla reported a production increase of just 23.4% in Q2, which is well below trend. However, given the massive challenges experienced by Giga Shanghai in Q2, it shouldn’t be surprising.
Notwithstanding, we are more concerned about whether Tesla can recover its production growth cadence markedly to compensate for its weak Q2 performance moving ahead, as July also looks to be an underwhelming month for deliveries.
The Chinese Passenger Car Association reported that Tesla delivered just 28.22K of vehicles from Shanghai in July, down from its record June result of 78.91K units. Notwithstanding, it’s primarily attributed to the retooling of Giga Shanghai to increase its production run rate. Hence, investors should expect Tesla to ramp its production and deliveries markedly from August.
Tesla CEO Elon Musk highlighted at its recent shareholder meeting that the company has achieved a 1.5M run rate and “might get close to” the 1.5M production mark in 2022 while exiting the year with a 2M run rate.
As seen in our chart, Tesla was able to ramp its production growth significantly in 2021, which compensated for its below-trend struggles in 2019. Hence, some investors may be inclined to consider the potential for Tesla to replicate its previous success.
However, we urge investors to assess that possibility very carefully. As seen in Tesla’s TTM production growth chart above, its growth has likely plateaued and possibly trending down.
Musk’s 1.5M production guidance for FY22 represents a 61.8% increase against FY21’s production. Hence, we should see a recovery toward its trend if Tesla achieves it. Note that Tesla produced 564.74K vehicles in H1’22. As such, it requires the company to produce about 935K of vehicles in H2’22.
However, July’s weak numbers from China suggest that Tesla could be under immense pressure to execute immaculately from August to December to meet Musk’s production guidance. While Musk is arguably at the “grandmaster” level regarding execution, investors are urged to carefully parse Q3’s production report. The window of opportunity to meet its highly challenging targets guidance could close quickly if Q3 metrics disappoint.
Don’t Overpay For Significantly Slower Growth
Many earlier (pre-COVID) Tesla investors (including us previously) have gotten used to Tesla’s stellar historical growth cadence.
However, we urge investors to avoid making such mistakes by looking to Tesla’s rapid growth years. Moving ahead, Tesla’s revenue and profitability growth is expected to slow significantly according to the revised consensus estimates (bullish).
Therefore, we believe it’s risky to continue expecting TSLA to deliver significant market outperformance, given TSLA’s steep growth premium.
Investors must consider that the competition is catching up quickly as BYD (OTCPK:BYDDY) topped Tesla in H1’22 with a higher EV market share (including hybrids). Furthermore, Tesla has lost its growth momentum in Europe as it’s still struggling to ramp up Berlin. As a result, we believe more intense competition and a more extensive production base could impact TSLA’s growth momentum, directly affecting its valuation.
Another Lower-High Price Top Could Unfold For TSLA
As seen above, TSLA has recovered remarkably from its May/June lows through August. However, TSLA’s steep recovery (steep recoveries are usually unreliable) led to a potential price top last week.
TSLA is at a critical juncture, as it could represent yet another lower-high top, which doesn’t bode well for its forward momentum. Furthermore, a buying upside failure at its critical 50-week moving average (blue line) could suggest a decisive loss of its bullish bias.
As a result, it could entrench TSLA in a sideways consolidation pattern or even a steeper fall to digest its embedded growth premium. Therefore, investors are urged to exercise significant caution at the current levels, as the price action is not constructive.
Is TSLA Stock A Buy, Sell, Or Hold?
TSLA last traded at an FY25 free cash flow yield of 2.7%. However, our internal valuation models suggest that such a growth premium is unsustainable given its markedly falling revenue and profitability growth estimates.
Furthermore, TSLA appears to be facing significant selling pressure at its near-term resistance, which is critical to regaining its bullish bias. A decisive failure in buying upside at the current levels could send TSLA down further, breaking below its May/June lows at the subsequent sell-off.
Therefore, we believe it’s a reasonable time for investors to cut exposure and layer out. Accordingly, we revise our rating on TSLA from Hold to Sell.