Tesla: Hold, Far From Matching Competition (Technical Analysis)

Summary:

• I maintain a hold rating for Tesla due to intensifying competition from BYD and weakening fundamentals, as shown by my DuPont analysis.
• Tesla’s Q3 2024 deliveries improved but fell short of expectations, with BYD showing significantly stronger growth and market position.
• BYD’s diverse product range and competitive pricing give it an edge over Tesla, making it a better investment prospect currently.
• Tesla’s technical indicators suggest a neutral outlook, justifying a hold decision until a breakout above the $281 price range.

Investment Thesis

In July, I published an article on TSLA where I reiterated a hold decision for this stock given its neutral outlook. Since that coverage, the stock has lost 3.51%. I expressed my pessimism about the company’s future growth given its production and delivery woes especially owing to the mounting competitive pressure from BYD. In this follow-up coverage, I will assess the production and delivery situation as of Q3 2024 majorly from a competition perspective as well as the stock’s technical trajectory.

I am maintaining my hold rating for Tesla, Inc. (NASDAQ:TSLA) due to the intensifying competition from BYD Company Limited (OTCPK:BYDDY) and the company’s weakening fundamentals as shown by my DuPont analysis. Further, with a beta of 2.08, it follows that the stock is 2x more volatile than the broader market hence a high-risk investment, especially given its current struggles stemming from intense competition. Consequently, I recommend patience before investing here.

Production & Deliveries Situation: Q3 2024 Shows An Improvement But Far From Competitive

In a previous analysis published on January 29, 2024, I went into great detail on Tesla’s growing competition. This has been impacting the company’s production and deliveries to a greater extent as it tries to adjust to the competitive landscape through initiatives like price wars and innovations like robotics to diversify from EVs to other business lines.

As of Q3 2024, the company showed some signs of recovery, but its performance was far from matching its major competitor BYD. Tesla produced about 470,000 vehicles and delivered approximately 463,000. This reflects a 4% increase in deliveries over Q2 2024 and a 6% year-on-year growth.

While this was a positive sign following two consecutive quarters of production and deliveries decline, I think the performance is not very convincing for several reasons. In the first place, the performance was below expectations with actual deliveries falling short by 1% from the expected which on its own is disappointing to investors and this explains its share slump of more than 3% on Wednesday when the news was released.

Although the company’s CEO, Elon Musk, stated that he expected deliveries to improve in 2024 from the record 1.8 million vehicles it delivered last year, Wednesday’s data makes that exceedingly tough and hints at a potentially poor Q4 and FY 2024. This is because, to at least avoid a decline in 2024 sales, the company must deliver a record 516,344 vehicles in Q4 of 2024.

Above all, TSLA’s performance is hardly compelling when viewed through the lens of competition. BYD, its rival, had an excellent quarter. In Q3 2024, BYD sold over 1.1 million vehicles, a notable 38% increase over Q3 2023. This comprises 685,830 plug-in hybrid cars and 443,426 all-electric cars. To narrow this competitive race to EV sales alone, TSLA’s performance is still underwhelming compared to BYD. For the first 9 months of 2024, the company has delivered approximately 1,293,656 EVs compared to 2023 where it had delivered about 1,324,074 EVs. On the other hand, BYD has sold about 1,169,579 EVs for the first 9 months of 2024 11.6% up from last year.

When comparing the two, BYD outpaces Tesla in terms of growth for both overall sales and EV sales. BYD’s market position has been strengthened by its broad portfolio and robust sales in both the EV and PHEV segments. This intensifying competition has seen BYD eat into Tesla’s BEV market share significantly to an almost equal share in 2024.

I believe BYD will keep outshining TSLA because of two major factors. The first one is its diverse product range. BYD offers both EVs and PHEVs under different models and brands such as Dynasty Ocean and Denza among others. This diverse product range helps them to serve different market segments from affordable EVs like the seagull to Luxury models. This diversity allows the company the flexibility to distribute risk as well as explore different markets for sustainable growth. For instance, in Q3 2024, PHEV sales surged by 76% and EV sales grew by about 3%. The weak growth in the EV market segment which has also been evident in Tesla signifies that BYD is leveraging the PHEV market segment for its growth, an ability that Tesla doesn’t have.

Most troubling, the adoption of EVs is slowing down at a time when competition is intensifying for TSLA something which raises concerns about its future growth. For BYD, its outlook is bright given that the PHEV market is projected to grow at a CAGR of 17.9% between 2024 and 2034.

The second aspect that, I believe, will enable BYD to continue beating Tesla in terms of growth is its competitive pricing. BYD’s aggressive pricing approach makes its vehicles more affordable to a broader variety of customers. By producing its batteries, it can cut expenses and pass those savings on to customers. For instance, the Seagull has been a top seller in China due to its affordable price. The seagull is priced at about $10, 000 which is way below Tesla’s equivalent product, the Tesla Model which is expected to be priced at about $25,000. Although Tesla has tried to cut prices previously to compete with BYD, this could never be achieved optimally considering it relies on external sources for its batteries an advantage that their competitor has over them.

In conclusion, TSLA is experiencing intense competition from BYD and other competitors, which I expect to continue putting pressure on its performance until it diversifies its business strategy and develops other cheaper brands to compete with BYD. However, there are some indicators of improvement, but I don’t believe they are compelling enough for long-term investors. I recommend patience as we assess the sustainability of the current growth and how the company responds to the evolving EV industry in a bid to sustain growth and beat the competition.

DuPont Analysis: Tesla’s Fundamentals Weaken As BYD’s Strengthen

While fundamental analysis is key in stock analysis, I will do a DuPont analysis to compare these two competitors. This model is highly beneficial because it breaks down the factors that drive the company’s ROE offering a deeper insight into its financial health. The three major components in the model are the net profit margin, Asset turnover, and equity multiplier. For a comprehensive and clear analysis, I analyzed the 2023 FY and on a TTM basis for both companies to establish how their fundamentals are evolving. Given this background below is the model output.

Looking at these data, it seems evident that Tesla’s fundamentals are deteriorating, as seen by its ROE falling from 23.57% in 2023 to 18.48% on a TTM basis and falling short of BYD’s trailing ROE of 21.6%, up from 19.81% in 2023. This demonstrates that TSLA is losing ground to its opponent, and it correlates with its underperformance against BYD in growth, as previously discussed.

Narrowing down to the specific elements of the analysis, although TSLA has a high net profit, it reflects its premium pricing, and its decline in TTM from 2023 signifies the impact of its price cuts to match the competition. For BYD, its margin is relatively stable, symbolizing its relatively stable pricing strategy and the lower margin compared to TSLA symbolizes its cheap pricing strategy.

Secondly, for the asset turnover, the TSLA ratio has declined from 0.91 to 0.84 where in both cases it has been lower than BYD’s which has increased from 0.87 to 0.93. This implies that generally, the latter has a high efficiency in using its assets to generate sales and is improving while the former has a lower efficiency which is even weakening.

Lastly is the equity multiplier. Both companies have maintained relatively stable equity multipliers, with Tesla’s standing at about 1.6 and BYD’s at approximately at 4.5. The latter’s high equity multiplier implies that it is using more debt compared to equity for its development, which is very beneficial, especially considering that its debt load possesses little risk in my opinion. With net cash of $4.36 billion, BYD faces basically no debt risk and therefore its capital structure is justified. This debt financing is beneficial since it doesn’t amount to dilutive issuance which lowers shareholders’ returns among other benefits ranging from tax benefits.

In a nutshell, BYD’s fundamentals have strengthened over time compared to Tesla’s, making it a better investment prospect than TSLA. Its efficiency and savvy capital structure are its strengths over TSLA.

Technical View: A Neutral Outlook

From a technical perspective, TSLA is exhibiting a neutral outlook. To begin with, the price appears to be moving vertically within a narrow price range between $200 and $260. Similarly, the 50-day, 100-day, and 200-day MAs are also moving horizontally, along with the price and in proximity with the price, further confirming the neutral outlook.

In addition, the RSI is at 57 which is within the neutral range of 50, and appears to be moving horizontally, both of which are neutral signals. Further, the MACD is slightly above the zero line and almost at the same level as the signal line. Notably, both the MACD and the signal line are exhibiting a horizontal trajectory further conforming to the neutral configuration of this stock.

To confirm the neutral outlook of this stock is the OBV and ROC indicators. The OBV is currently in a dominant horizontal pattern. This suggests that there is no significant change in volume flow relative to the price movement, and therefore neither buying nor selling pressure is high. On the other hand, the ROC is approximately at zero which shows a lack of momentum in either direction.

Given this background, this stock is in a clear neutral outlook, which implies that it could be consolidating at a point at which a hold decision is justified before making any investment decisions. A good entry point for long-term investors would be a break-out above the $281 price range, which is a major pivot point acting as a temporary resistance zone.

Conclusion

In conclusion, although TSLA has shown some improvement in the Q3 2024 deliveries and production, the positivity has been overshadowed by BYD’s far better performance than Tesla and the significant deficit it has to meet in Q4 2024 to overturn what looks like a 2024 FY underwhelming performance compared to 2023 FY. In addition, BYD appears to be in a better position to keep outshining TSLA given its product diversity and competitive pricing. Above all, BYD’s fundamentals are improving, making it a better investment choice over TSLA currently.

TSLA is in the process of unveiling its robotic business line to beef up its competitiveness. Its full impact won’t be felt anytime soon, and therefore my reservation about investing in this stock at the moment. Given this background and the neutral outlook exhibited by the technical analysis, I believe Tesla is a hold for now.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

---

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

---