When it comes to Tesla (NASDAQ:) stock, there’s no sugarcoating the truth. It has been an ugly 2019.
While the stock market has rallied almost 15% this year on the back of improving economic conditions, TSLA stock has gone in the opposite direction. Tesla stock price is down nearly 40% year-to-date as the bulls’ thesis on TSLA stock has seemingly fallen apart in the early parts of 2019.
Specifically, after a huge Model 3 production and demand surge in the U.S. in late 2018, domestic demand has fallen flat in early 2019. That flat demand comes against the backdrop of a domestic electric-vehicle market that is likewise stagnating in early 2019, thanks to lower EV adoption incentives. Simultaneously, Tesla is struggling to deliver the Model 3 overseas, and its international sales haven’t quite lived up to expectations, either. The shortfall in production and sales volume has led to continued margin headaches, and TSLA has generated losses in early 2019.
Overall, the bull thesis supporting TSLA stock is falling apart.
But, with TSLA stock price near its 52-week lows, is it really time to throw in the towel on Tesla stock? Or is now the time to get bullish, when everyone else is bearish?
I think investors should take the latter approach. U.S. EV market conditions should improve as 2019 progresses, and that should lead to higher Model 3 sales in the U.S. At the same time, Tesla should solve its international logistics problems, and that should boost its overseas sales. So Tesla’s results should get better as 2019 progresses, causing Tesla stock to rebound.
U.S. Demand Will Come Back
The bull thesis on TSLA stock is that things won’t remain this bad forever. Indeed, things should improve as 2019 progresses.
Three main negative catalysts have weighed on Tesla stock this year: stagnating EV demand in the U.S., struggling Model 3 sales in the U.S., and logistics challenges in international markets. All three of those headwinds will ease later this year, and could even turn into tailwinds.
EV sales in the U.S. are up year-over-year through April, and have come in well below expectations. But EV sales globally are up more than 60% so far this year. Thus, this isn’t a global problem. EV demand is only stagnating here.
It seems like the U.S. EV slowdown in 2019 is due to lower incentives, caused by many EV producers no longer being able to offer peak incentives. But there’s talk in Washington about boosting the number of vehicles per manufacturer that qualify for EV tax credits from 200,000 to 600,000 vehicles. If that happens, U.S. EV demand should re-accelerate.
Meanwhile, Model 3 demand in the U.S. has slowed in 2019, causing Tesla’s market share to contract. Tesla’s U.S. EV market share this year is around 51%, versus 53% in 2018.
But this slowdown can be attributed to the fact that the Model 3 surge in late 2018 was so huge that everyone who wanted a Model 3 already has one. As a result, demand for the vehicle has been relatively flat recently. But it will build back up as consumer EV demand grows heading into the end of 2019.
In the U.S., then, relatively muted demand for Tesla’s vehicles is a near-term phenomenon that should improve by mid-to-late 2019.
The International Business Will Improve, Too
On the international front, Tesla’s fundamentals should improve as 2019 progresses, too.
So far this year, Tesla has had challenges delivering its vehicles into international markets. These challenges stem from two things. First, Tesla has little experience delivering a mass-market electric vehicle into Europe and Asia. Secondly, trade tensions have made it difficult for U.S. auto companies to sell their vehicles in Asia.
But Tesla won’t remain new to international logistics forever. Trade tensions also won’t hang around forever.
Instead, Tesla will eventually figure out international logistics, much like it figured out domestic logistics. Consequently, it will be able to increase its international production and deliveries over the next several quarters. Furthermore, trade tensions should improve in the foreseeable future, especially on the auto front, after the Trump administration decided to delay imposing new auto tariffs.
In other words, like Tesla’s U.S. operations, the company’s international operations will improve into the end of 2019.
The Bottom Line on Tesla Stock
It has been an ugly 2019 for TSLA stock. The bull thesis on Tesla stock is ostensibly falling apart, and TSLA stock price has dropped off a cliff.
But now may not be the best time to throw in the towel. Sure, things seem bleak for Tesla stock today. But they will probably look a lot better in three to six months, meaning that Tesla stock price could bounce back over the next few months.
As of this writing, Luke Lango was long TSLA.
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