Tesla has given back some of its gains after the stocks whirlwind rally. Did Elon Musk over-promise in the fourth-quarter earnings call?
Tesla (NASDAQ:TSLA) bulls are on thin ice after the stock’s monster rally raises questions about sustainability and valuation. At these frothy levels, even the littlest bit of bad news can send shares tumbling lower.
Tesla’s market cap has already shed billions Wednesday – falling over 10% in early morning trading over fears that the coronavirus outbreak will delay the timeline for new vehicle deliveries in China. With expectations for the electric automaker so high, Elon Musk can’t afford any setbacks in 2020.
Tesla bulls are still feeling the buzz from a whirlwind rally that started with the company’s fourth-quarter earnings result on Jan. 30. Tesla went into 2020 trading at around $430 per share before going on a parabolic rally that took prices to an all-time high of $968.
The company’s market cap reached a record-breaking $160 billion – a valuation so massive that famous short-seller Andrew Left of Citron Research claimed that even Elon would go short at these levels if he was a fund manager.
But in total, Tesla short-sellers have already lost over $8 billion in 2020 – with $2.5 billion of that figure lost on Monday alone. So shorting the company has historically been a very bad idea.
While Tesla’s controversial rally may seem like baseless speculation to some observers, it’s largely based on the company’s guidance for the full year 2020. If Musk can’t fulfill his promises, the stock could give back much of its gains.
Elon claims that vehicle deliveries in 2020 will comfortably exceed 500,000 units. This is a figure that is driven, in large part, by projections for China. The Asian nation represents a little over 10% of the automaker’s total revenue and much of its future growth prospects. Tesla recently rolled out the affordable Model 3 to Chinese customers and the company hopes to rapidly scale up production in the coming months.
But importing the cars from the U.S. probably won’t give Tesla enough leverage to achieve its ambitious projections.
Musk stated the following during the fourth-quarter call:
We need to bring the Shanghai factory online. I think that’s the biggest variable for getting to 500,000-plus a year. Our car is just very expensive going into China. We’ve got import duties, we’ve got transport costs, we’ve got higher costs of labor here.
We need the Shanghai factory to have the cars be affordable. It’s important to appreciate, the demand for Model 3 is insanely high. The inhibitor is affordability
The Wuhan coronavirus outbreak may throw a monkey wrench in Elon Musks’ plans for 500,000 deliveries in 2020. The Shanghai Gigafactory that builds the Chinese Model 3 is currently closed due to the ongoing crisis. As the outbreak continues to grow, the economic impacts may go from bad to worse.
According to the latest data, the Wuhan coronavirus, which is provisionally known as 2019-nCoV, has come to infect a total of 24,607 people with almost 500 fatalities. Many expect the epidemic may grow to become a global pandemic.
With such severe short-term headwinds in one of Tesla’s biggest growth markets, it may have been irresponsible of Musk to guide so optimistically in the fourth-quarter earnings call. Tesla’s management should have taken the opportunity to tamper expectations and prevent speculative zeal from creating an extreme and, perhaps, unsustainable rally in the stock.