Tesla‘s (NASDAQ:TSLA) shares suffered severe losses in the first quarter and much of the second before rallying in recent weeks. Investors became more bullish about Tesla stock in hopes that the company would be able to pull off a Q2 earnings beat and show improved profitability.
But the earnings report on July 23 contained more bad news than good. While the American electric vehicle maker posted production and delivery results that were better than analysts expected, TSLA stock still faces some significant headwinds, both macroeconomic and industry-specific.
Tesla stock is down 1% for the year, but the stock looks likely to dip following an earnings report that saw TSLA lose 7% in after-hours trading.
Here are three reasons why Tesla remains overhyped and could see its shares sink even more.
Q2 Earnings Results Were Nothing to Write Home About
First, the good news. Tesla beat analysts’ expectations for production and deliveries. Telsa produced 410,841 vehicles and delivered 443,956, while analysts had expected deliveries of 439,000. However, even though Tesla topped expectations, the delivery figure dropped by 4.8% from a year ago. Production numbers were also down 14% from last year.
There’s more bad news. Tesla’s automotive revenue of $19.8 billion in the second quarter was down 7% from a year ago, and the company posted overall revenue growth of only 2%. And because Tesla offered discounts and incentives in the U.S. and China to stave off competition and increase demand, income from operations was down 33% while operating expenses grew 39%.
Net income dropped a whopping 45%, from $2.7 billion and 78 cents per share to $1.45 billion and 42 cents per share.
Tesla Is Facing Intense Competition from Chinese EVs
Chinese electric vehicles, despite Western tariffs, pose a serious threat to EV makers like Tesla. China’s BYD (OTCMKTS:BYDDY) is, again, set to be the world’s largest producer of battery electric vehicles in 2024. While Tesla’s battery electric vehicle sales declined in Q2, BYD recorded 426,039 vehicles, representing a 21% year-over-year increase.
Tesla is also quickly losing market share in China. At the end of 2023, Tesla’s market share dropped from 10.5% in the first quarter of 2023 to 6.7%. For the first two months of the year, Tesla’s market share floated around 6.6%.
It’s not hard to understand why, either. Not only are there a plethora of solid Chinese competitors, including Li Auto, (NASDAQ:LI), Nio (NYSE:NIO) and XPeng (NYSE:XPEV), but these manufacturers offer a variety of vehicles at a range of prices. Tesla currently only has the Model 3 sedan and Model Y sport utility vehicle for sale in China, according to reporting by Bloomberg.
Valuation Is Beyond Stretched
Tesla is trading at an expensive 84x forward earnings valuation. For a company facing several competitive risks and seeing sales decline, that valuation just doesn’t make sense. BYD, Tesla’s most formidable competitor, is at a 20.4x forward earnings valuation.
There is a reason for this, of course. Chinese stocks are not doing well because of the economic uncertainty reeling through the world’s second-largest economy. Still, high-tech sectors, such as EVs, continue to grow, yet Chinese EVs trade at significant discounts.
If the EV sector evolves the way governments worldwide say they want it to, the real battleground will be in lower-cost vehicles. That’s where the bigger market is, and Tesla still doesn’t have a clear roadmap to capture budget-conscious consumers effectively.
On the date of publication, Tyrik Torres did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor held a LONG position in LI.