Tesla’s shares drop due to concerns about inefficient production, low demand

Article by Christian Andrei, on February 24, 2016

Uncertainties in demand for electric cars forced Tesla’s shares to fall to a two-year low with the price closing at $147.99, a 9 percent slide to the its previous day price. The market reflected negative sentiments caused by cheaper gasoline which is perceived as having a dampening effect in the demand for electric cars.

Another cause for concern that might have contributed to the price adjustment was the perceived inability to efficiently produce the Model X crossover which could affect the company’s bottomline in the long run. After producing 50,580 units last year, Tesla previously announced its ambitious target to produce 500,000 by 2020.

However, many doubt that the company could reach this target, given the current production delays of its Model X. Adding to this uncertainty is the current gasoline price of the below $2 per gallon which might convince people to stick to gasoline models.

Market watchers are eagerly anticipating any updates by CEO Elon Musk on these matters. Earlier, Musk announced a plan of producing between 1,600 and 1,800 model S and X cars a week for 2016.

Analyst James Albertine of Stifel, Nicolaus & Co., in a note to clients, wrote that 80,000 to 85,000 estimated annual vehicle production rate based on the weekly figure given by Musk might be updated to a lower amount, which could trigger a sell-off in its shares. But not all analysts share the same sentiment.

According to Dan Galves of Credit Suisse in a research note to clients, the selloff in Tesla’s share was initially justifiable given the declining oil price scenario but continuing the trend based on perceived Model X production problems would be overdoing it.

Some are speculating more delays, this time with the scheduled launch of Tesla’s highly-anticipated moderately priced car, the Model 3. Recent announcements made by GM to launch its own $35,000 Chevy Bolt electric car by year end could worsen the effect of any delay in Tesla’s model 3 production.

At the moment, everything seems to be hinged on the Tesla’s Reno, Nevada battery factory if it can keep up its battery production with the projected rise in Model 3 demand. Competition in the electric car niche seems to be heating up with the announcements of German automakers to accelerate their plans of producing luxury electric cars.

At the moment, Tesla has a head start in technological offerings to customers such as over-the-air software upgrade features but other automakers are trying to catch up. For analysts Adam Hull and Paul Kratz of German bank Berenberg, Tesla could be facing a case of “sleep (auto) giants waking up.”

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