When your biggest market falls out of love with your product, it's a problem. That's what Tesla (TSLA) CEO Elon Musk is facing right now. And he's facing it in the U.S., where the electric-vehicle ("EV") maker gets about half of its business.
With Problems at Home, Tesla Is Looking to China
By Vic Lederman, editorial director, Chaikin Analytics
When your biggest market falls out of love with your product, it's a problem.
That's what Tesla (TSLA) CEO Elon Musk is facing right now. And he's facing it in the U.S., where the electric-vehicle ("EV") maker gets about half of its business.
First-quarter sales of EVs in the U.S. fell more than 15% from the previous quarter.
And year over year, Tesla saw its total automotive revenues fall 13% in the first quarter.
It looks like this once-roaring-hot market is struggling.
But it's not like EVs have quickly saturated the U.S. car market...
Last year, out of the roughly 15.5 million light vehicles sold in the country, only about 1.2 million were electric. That's a penetration rate of less than 8%.
Heck, it's what a lot of analysts would categorize as being still in the early stages of growth.
But a more than 15% quarter-over-quarter decline is just something you don't normally see in a growth industry.
As I'll explain today, this is worrisome for two key reasons. And I'll also discuss how this relates to Tesla's increasing focus on China...
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The first reason for worry is on an industry level.
A sequential decline this steep will force carmakers of all stripes to rethink their EV strategy for the world's second-largest car market.
You see, most carmakers weren't as early in the game as Tesla was. They're still building up their EV lineup and production capabilities.
It costs billions of dollars to build an EV plant from scratch. Tesla's Gigafactory in Germany had a roughly $5 billion price tag. And it's not even the company's biggest one.
Retrofitting an existing factory is also expensive. Last year, Ford Motor (F) announced it would be spending $1.3 billion transforming its more than 70-year-old factory in Oakville, Ontario to churn out EVs.
So when major carmakers see a quarterly EV sales decline like 15% while total passenger car sales grew more than 8%, it makes them think twice about the tens of billions they're planning to spend on new EV-production capacity.
Indeed, after seeing heavy losses at its dedicated EV unit build up over the past quarters, Ford shifted its focus toward introducing a comprehensive lineup of hybrid models.
In January, General Motors (GM) CEO Mary Barra announced that the company would introduce hybrid vehicles to the North American market after noting slowing sales for EVs.
Moving on, the second reason for the worrying sales decline is Tesla-specific.
The company's biggest market – where it sells 1 of every 2 EVs – is taking a turn for the worse.
Americans still want to buy cars. But they aren't buying as many EVs as they used to.
You see, Tesla is a barometer for the U.S. EV market. At one point, it was the U.S. EV market.
So far, that market is turning out to not be as big as people hoped it would be by now. And there are several reasons for this...
Many folks are worried about getting stuck in the middle of nowhere without a socket to plug into.
Others just don't like the idea of having to wait more than 10 minutes to "fill up" at a charging station. And the thought of waiting in line for other people to finish charging their EVs – a process that could easily take 30 minutes – is a deal-breaker.
Some folks worry about batteries exploding spontaneously or on impact.
Meanwhile, others just don't like driving a car that doesn't make any sound at all. They think it's boring, will put them to sleep, or is just plain "uncool."
Whatever the reasons, the slowdown we're seeing in the U.S. EV market today isn't something to take lightly.
And Musk isn't taking it lightly, either...
He made a surprise trip to China at the end of April. He went there in part to seek regulatory approval to roll out Tesla's Full Self-Driving ("FSD") feature in the company's second-largest market.
But he also made the trip for another reason...
China's EV market – already the largest in the world – continues to grow at a healthy clip. In the first quarter of the year, overall EV sales grew nearly 15% year over year to more than 1 million.
One out of every 5 cars sold in China today is an EV. If we included hybrid vehicles, that ratio would jump to 1 out of every 3 cars.
It's unlikely that Tesla will roll out a hybrid vehicle. It's just not in the company's DNA.
But China's car market is moving faster toward mass electrification than any other major market in the world.
That means it will also be the world's fastest-growing autonomous-vehicle market.
Both are right up Tesla's alley. So it makes sense that Musk would want to focus on growing Tesla's Chinese presence in light of the EV hesitancy he's seeing in the U.S.
But Tesla's bigger focus on China doesn't mean that the stock is a good place to put money to work today...
As we said back in January, China's EV market is massively competitive. And Tesla is a distant second in the country to homegrown brand BYD.
Keep in mind that big consumer companies are joining the EV fray, including Huawei and Xiaomi, with head-turning designs and eye-popping features. And they have deep pockets.
Remember that back in January when we discussed the pressures at Tesla, the company had a "very bearish" rating in the Power Gauge.
Tesla is also in "very bearish" territory today. That means our system sees risks and challenges ahead for the company.
Putting it all together right now, Tesla is becoming more dependent on China. But that's not necessarily a good thing. And the Power Gauge is again saying to avoid this stock.
Good investing,
Vic Lederman
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
-1.48%
4
23
3
S&P 500
-1.58%
113
311
72
Nasdaq
-1.89%
16
65
19
Small Caps
-2.03%
337
1129
439
Bonds
-0.85%
— According to the Chaikin Power Bar, Small Cap stocks are somewhat more Bearish than Large Cap stocks. Major indexes are mixed.
* * * *
Sector Tracker
Sector movement over the last 5 days
Discretionary
+1.79%
Utilities
+0.6%
Materials
+0.4%
Staples
+0.19%
Information Technology
-0.46%
Health Care
-0.69%
Real Estate
-0.85%
Industrials
-1.26%
Financial
-1.87%
Energy
-2.7%
Communication
-3.63%
* * * *
Industry Focus
Dow Jones REIT Services
2
46
54
Over the past 6 months, the Dow Jones REIT subsector (RWR) has underperformed the S&P 500 by -8.64%. Its Power Bar ratio, which measures future potential, is Very Weak, with more Bearish than Bullish stocks. It is currently ranked #20 of 21 subsectors.
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