Why Does Tesla’s Stock Price Drop When the Company Reports Bad News?
Investors are keeping a close eye on Tesla (TSLA) as the electric car manufacturer struggles to keep the faith in the market. After experiencing a 40% price drop since its last earnings report, what’s going on at Tesla and how difficult is the road ahead for the company? Let’s explore the facts surrounding the electric car maker and its stock price in light of recent news.
Tesla’s Sales Levels And The Huge Demand For Its Cars
Tesla has been making headlines for all the wrong reasons, as the company’s stock price fell over 40% in the past three months due to a number of issues. Following are the top factors responsible for the car maker’s recent struggles.
Poor Product Differentiation
Differentiation is the process of distinguishing your product from your competitors’ products. For Tesla, it’s a major problem. While the company has achieved incredible sales figures, it’s also become apparent that there’s a great deal of competition when it comes to the EV segment. As a result, Tesla has been suffering since investors have lost confidence in the firm’s ability to maintain its competitive edge. In an effort to stem the tide of red, Tesla’s management has unveiled its new product strategy – the Model 3. Essentially, this will be a mass-market electric car that aims to attract a wider audience and draw in new buyers. While the Model 3 is a welcome step in the right direction, in the short term it won’t be enough to save Tesla. After all, there are other up-and-coming EV makers such as NIO (NIO), Faraday Future (FF), and others.
Tesla’s expansion is a double-edged sword. On one hand, the company has grown its sales and delivery network substantially over the past couple of years. In 2018, it boasted over 500,000 vehicle deliveries worldwide. That’s a lot of cars! However, at least for the time being, it’s not clear that this level of expansion can continue without causing the firm some serious damage. After all, the demand for electric cars is already high and there are fewer and fewer reasons for people to opt for an internal combustion engine vehicle. In the long term, Tesla’s growth has been phenomenal, but in the short term it has definitely posed some challenges. For example, Tesla recently opened up its very own store in Shanghai, China, however, it hasn’t had much luck with its first store in Hong Kong.
Tesla’s problems are clearly visible in its financial statements. While the company has achieved incredible growth, it has also spent generously to secure its position in the market. The firm had $11.8 billion in cash and short-term investments as of June 30, 2019. So, while cash is king, it’s increasingly evident that Tesla has gone overboard in its efforts to secure its financial future.
Lack Of Focus
In an effort to make money, Tesla has been forced to sacrifice focus. The company’s management has been preoccupied with growing the business, rather than product planning and development. As a result, Tesla has had to rush manufacturing of its vehicles, causing quality control issues and delivery delays. Some insiders have gone so far as to accuse Tesla of having a’management death spiral’, as the firm’s poor strategic planning and a lack of focus have led to more problems.
Dearth Of Management Talent
Aside from focusing on growth and getting its house in order, Tesla has been unable to bring in seasoned executives that can lead it to its next level. The problem is that the CEO position has been largely handled by professional managers, rather than experienced business executives. While they’ve done an admirable job of getting the business to where it is today, someone with more experience would have been able to take the firm further than it has managed to go so far itself.
With all of this in mind, it’s paramount to keep a careful eye on Tesla. As an investor, it’s essential that you’re not buying into a company that you believe is going to fall apart any day now. One good indicator that all is not well at Tesla is when its share price drops significantly, often following a negative earnings report or piece of news. This happens because there’s often a short-term reaction when a stock experiences a sharp decline in value. On one hand, traders and investors tend to avoid stocks that are falling, as they assume that these are bad investments. On the other, traders and investors typically see shares that are rising as a positive omen, as people tend to believe that these are good investments. In the case of Tesla, however, it’s quite the opposite, as most people believe that the stock is going to keep declining in value.
In the final analysis, Tesla’s challenges are quite clear. Without a doubt, the company is going through a serious transition phase, as it works to secure its position in the market and redefine its product strategy. Nevertheless, at this stage, Tesla’s issues and weaknesses are quite evident, as reflected in its stock price. To be sure, the electric car maker’s future looks pretty grim, as most industry insiders believe that Tesla will continue its decline and eventually go bankrupt. For now, at least you know what stock to avoid and why.