Why Tesla Stock Should Panic About China’s Auto Sales Implosion

China’s auto sales implosion is a tremendous threat to Tesla stock. | Source: REUTERS/Mike Blake

  • The Chinese automobile industry is in freefall as the country deals with the economic fallout from the coronavirus outbreak.
  • Tesla depends on China to fulfill the optimistic guidance provided by Elon Musk.
  • Tesla probably won’t be able to meet its forecasts because of China-related headwinds.

Car sales in China dropped by 92% in the first two weeks of February due to the continued fallout from the Wuhan coronavirus outbreak. With the Chinese economy in the doldrums, it is looking increasingly impossible for Tesla (NASDAQ: TSLA) to fulfill the promises Elon Musk made in a fourth-quarter earnings presentation.

The electric carmaker may have to cut 2020 guidance, and this could lead to a massive correction in the stock.

Tesla Stock’s Inexplicable Rally

Tesla’s stock has almost tripled in the last six months. | Source: ycharts.com

Tesla’s share price has been on a tear since the start of February after the company reported better-than-expected fourth-quarter earnings. The carmaker now commands a market cap of over $160 billion despite only generating $24.6 billion in revenue in fiscal 2019.

Elon Musk gave optimistic projections during the earnings call. But he may have trouble fulfilling these promises.

The controversial CEO claimed that Tesla’s vehicle deliveries would comfortably exceed 500,000 units in 2020. And he believes the Chinese market is the key to obtaining this goal through the company’s new Shanghai manufacturing facility.

He stated the following:

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.

But while Tesla managed to get the Shanghai factory back open, Musk failed to account for the impact the coronavirus would have on demand for cars in China. So far, it’s not looking pretty.

When You Build It, Will They Come?

China’s auto market woes put Tesla’s breathtaking rally at risk. | Source: REUTERS/Lucy Nicholson

Elon Musk seems to think that all Tesla has to do is build cars and Chinese customers will automatically buy them. But it is increasingly looking like that will not be the case.

Demand may not match supply.

The Wuhan coronavirus outbreak has infected a staggering number of people. And several Chinese cities are still on lockdown. American companies are already feeling the economic ramifications of the crisis, with Apple slashing guidance over virus concerns. Will Tesla somehow escape the carnage unscathed? It’s not likely.

The auto industry looks to be especially hard-hit by the coronavirus fallout.

Chinese Automobile Sales Are in Freefall

According to data from the China Passenger Car Association, the coronavirus outbreak has caused automobile sales to nosedive in the country.

Sales have dropped by 92% in the first half of February, and automobile deliveries are expected to be down 70% for the month.

Cui Dongshu, secretary-general of the association, states:

There was barely anybody at car dealers in the first week of February as most people stayed at home.

While Cui believes the situation will improve later in the month, that may not be enough to stop Tesla, and other China-dependant manufacturers, from missing their 2020 sales forecasts.

In fact, car sales in China have been on a three-year decline, with an 8% drop in 2019 alone. Ford’s Chinese sales plunged by 26% last year, while GM saw sales fall by 15% – and this was before the coronavirus. Tesla doesn’t stand a chance against all these headwinds.

Elon Musk should reconsider his optimistic guidance, and investors should prepare for a correction in Tesla’s stock price.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.

This article was edited by Josiah Wilmoth.

Last modified: February 21, 2020 9:49 PM UTC

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