What happened
The S&P 500 index dropped more than 20% in the first half of 2022, but Tesla (TSLA 1.85%) stock did even worse. Tesla shareholders saw their holdings down 36.3% in 2022 through June 30, according to data provided by S&P Global Market Intelligence. Even after the stock has staged a recovery in early July, shares remain down 28.8% year to date.
So what
Investors shouldn't be overly surprised by the correction in Tesla stock. The company was valued at more than $1 trillion to start the year, giving it a price-to-earnings (P/E) ratio of more than 200 at the time. Investors were valuing it on its future potential, and once there was a hiccup in its growth trajectory, the stock was bound to drop.
Image source: Tesla.
That hiccup occurred in the second quarter. Pandemic-related lockdowns in Shanghai virtually halted production at Tesla's most profitable plant. The facility gradually resumed production and ramped up its volume in May and especially June. But Tesla said it delivered just 254,695 vehicles in the second quarter, compared to initial estimates of about 350,000 prior to the shutdowns.
Now what
Tesla's second-quarter struggles weren't just isolated in Shanghai. Supply chain disruptions that have affected the entire automotive industry have slowed the production ramp-up of Tesla's new factories in Germany and Texas. CEO Elon Musk said those facilities were burning billions in cash from start-up costs and lower-than-planned production volumes.
Those two new plants are key to help Tesla achieve 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 Tesla may still be on track to do that this year, helping the stock to bounce in July.
Reuters reported that Tesla sold a record 78,906 from its Shanghai factory in June. That was up from about 32,000 just the month prior. Upgrades made at that plant should allow the company to boost that rate of production even further. If there are no further disruptions from lockdowns and its new plants ramp up successfully, Tesla could still meet or exceed 1.4 million vehicles delivered in 2022.
The decline in the share price has brought Tesla's P/E down substantially. The company earned $3.3 billion in the first quarter, but that will drop in the second quarter due to the production issues it worked through. Still, if it meets average analyst expectations for 2022, the stock is trading at a P/E closer to 60 right now.
That's still richly valued, but if the company does hit its multi-year 50% growth rate, it won't take very long to justify its current valuation. That doesn't mean Tesla shares will only go up from here. But its recent price makes for a reasonable entry point for those with a long time horizon, as demand in the EV sector is likely to grow for years to come.
