Why Tesla is down nearly 30% this year

What happened

The S&P500 the index fell more than 20% in the first half of 2022, but You’re here (NASDAQ: TSLA) the stock did even worse. Tesla shareholders saw their holdings drop 36.3% in 2022 through June 30, according to data provided by S&P Global Market Intelligence. Even after the stock rallied in early July, the stock remains down 28.8% year-to-date.

So what

Investors shouldn’t be too surprised by Tesla’s stock correction. The company was valued at over $1 trillion at the start of the year, giving it a price-to-earnings (P/E) ratio of over 200 at the time. Investors were pricing it on its future potential, and once there was a hiccup in its growth trajectory, the stock was bound to fall.

Image source: Tesla.

This hitch happened in the second quarter. Pandemic-related lockdowns in Shanghai have all but halted production at Tesla’s most profitable factory. The factory gradually resumed production and increased its volume in May and especially in June. But Tesla said it only delivered 254,695 vehicles in the second quarter, down from initial estimates of around 350,000 before the shutdowns.

Now what

Tesla’s second-quarter struggles weren’t just isolated to Shanghai. Supply chain disruptions that have affected the entire auto industry have slowed the ramp-up of production at Tesla’s new factories in Germany and Texas. CEO Elon Musk said these facilities were burning billions of dollars in cash thanks to start-up costs and lower-than-expected production volumes.

These two new factories are key to helping Tesla meet its 50% annual production growth target. After delivering more than 936,000 vehicles in 2021, the company said it believes it can increase that by 50% per year for several more years. Data from June shows that Tesla may still be on track to do so this year, helping the stock rebound in July.

Reuters reported that Tesla sold a record 78,906 from its Shanghai factory in June. That was up from around 32,000 the previous month. Improvements to this plant should allow the company to increase this production rate even further. If there are no more disruptions from shutdowns and its new factories start up successfully, Tesla could still hit or exceed 1.4 million vehicles delivered in 2022.

The decline in share price has significantly lowered Tesla’s P/E. The company earned $3.3 billion in the first quarter, but that will drop in the second quarter due to the production issues it faced. Still, if it meets average analyst expectations for 2022, the stock is currently trading at a P/E closer to 60.

It’s still highly valued, but if the company hits its multi-year growth rate of 50%, it won’t take long to justify its current valuation. That doesn’t mean Tesla’s stock will only go up from here. But its recent price is a reasonable entry point for those with a long-term horizon, as demand in the electric vehicle sector is expected to increase in the coming years.

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Howard Smith has no position in the stocks mentioned. The Motley Fool holds positions and endorses Tesla. The Motley Fool has a disclosure policy.

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