Tesla Stock Hits A Speed Bump. Demand Under Pressure?

Tesla Inc (NASDAQ:TSLA) stock is almost flat in the last three months.

Between the beginning of December last year and mid-June this year, shareholders of Palo Alto California based electric car maker Tesla Inc (NASDAQ:TSLA) saw their investment double. Tesla stock had rallied more than 100% in his period and was up 80% for the year. The rally in the stock was seeming unstoppable, with the $400 per share mark close in sight. However, the rally in the stock has come to an abrupt halt. In spite of some swings, the stock is almost flat in the last three months. So what brought the rally in TSLA stock to an abrupt halt?

Tesla stock had rallied too far too soon.

To begin with, Tesla stock had rallied too far, given the fundamentals and the story on the ground. The initial rally was kick started after Elon Musk was inducted into President Trump’s CEO Council. The focus later shifted to the start of production at Tesla’s gigafactory and then to the launch of the Model 3. The stock rally was also helped by bullish commentary from multiple analysts. Tesla also reported better than expected deliveries in the first quarter. Tesla stock also got a lift after Mr. Musk announced plans for another mass market electric car and more importantly semi-autonomous trailer trucks. All these were good news, but a 100% rally in the price was not justified, especially given the headwinds Tesla was facing.

Tesla stock took a massive beating after the company reported lower than expected delivery numbers followed by a slew of negative analyst reports and price target cuts. Analysts raised issues with the expensive valuations of Tesla stock, huge cash burn, and massive debt pile. While the stock has recovered since then, it faces several challenges, mainly relating to the production of its Model 3 cars. The focus on the risks along with macroeconomic and geopolitical tensions have kept Tesla stock price in check.

Is demand for Model S and Model X under pressure?

While Tesla is concentrating now on the production of Model 3, there are concerns now that demand for its Model S and Model X products are under pressure. Tesla had recently reduced the price of Model S and X vehicles with 100 kWh battery packs on its site. The 100D models got a starting price cut of $3,500, while the performance versions saw a $5,000 decrease. Tesla had previously slashed prices on Model X cars. Tesla is also lowering the interest rates it charges on leases. While Elon Musk has clarified several times that Tesla as a policy doesn’t discount new vehicles, reports are emerging that Tesla is offering hefty discounts on new cars. According to electrek, several Tesla owners recently received emails which offered up to $30,000 showroom discount on P100D vehicles. Though Tesla later clarified that the email was wrong in the sense that discounts were not on new vehicles.

The official reason given by the company is “Tesla is passing cost efficiency improvements of approximately 3% in 100 kWH pack production through to customers.” The thing is that Tesla is piling up heavy losses and burning billions of dollars of cash. So ideally, the company wouldn’t have slashed its prices to pass on the efficiency gains but would have tried to reduce its losses and cash burn. The requirement that the customer takes the delivery before the end of the quarter in order to be eligible for the discount also raises questions. Tesla sales are heavily down year by year, though Model X is faring better than Model S. According to insideevs, Tesla sold 6,800 units in July and August this year, down 8% from 7,389 vehicles it had sold last year in the same period. Model S sales in June-July-August are down a whopping 31% compared to the same months in the last year.

There could be two reasons for the slowdown in sales. Firstly the demand for Model S is declining. Demand for Model S had peaked in the fourth quarter of 2015. The company had delivered over 17k Model S sedans in that quarter. Since then, Model S deliveries have trended lower. In the most recent quarter, Tesla delivered 12,000 Model S sedans, a far cry from its peak. There is also concern that Model X sales are starting to stagnate. However, in the letter to shareholders, the company had said that the demand for luxury models is picking up. According to the company, in July, weekly net order rate for Model S and Model X was about 15% higher than Q2 average weekly order rate. Though this doesn’t conform with the numbers reported by insideevs.

Another reason could be that Model 3 is cannibalizing Model S sales, a possibility discussed by Elon Musk himself. On July 28th, Tesla announced the 310-mile Model 3 for $44,000. You can get Model S kind of mileage at almost half the price. During the conference call, Mr. Musk had said: “We have seen some impact of Model S orders as a function of people being confused“.

Tesla stock has found support.

Tesla stock has struggled a bit in the last three months. The stock faced several downside pressures. However, Tesla stock has found strong support from the 100-day moving average in the last three months. The 100-day moving average has come to shareholders’ rescue several times in the last few months. Unless macroeconomic or geopolitical situations further worsen, the 100-day moving average support line is likely to hold for now.

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