With shares down 35% year to date, many Tesla (TSLA +2.71%) investors have decided that Trump's election victory isn't the windfall they expected. The company is reeling from slowing international sales due in part to CEO Elon Musk's political involvement in the new administration. Meanwhile, Chinese rivals like BYD have encroached on Tesla's market share in several important regions.
On April 2, the situation will get even more complicated as the Trump administration reveals wide-ranging tariffs on goods imported into the U.S., some of which have already taken effect. Let's explore how a fracturing global economy could affect Tesla's long-term performance.
NASDAQ: TSLA
Key Data Points
What to expect on April 2
April 2 will be a big day for Tesla. On top of the political developments, the automaker is expected to release its much-anticipated first-quarter production and delivery figures. Investors should brace for bad news. Preliminary reports suggest Tesla is experiencing dramatic declines in Europe, where Musk's political antics have been poorly received.
According to Reuters, Tesla sold only 1,429 cars in Germany in February, a decline of 76% from last year, which follows a drop of 60% in January. This negative trend occurred despite the country's overall electric vehicle sales rising 31% to 35,949 in the period. This weakness occurred across the European Union (EU), where Tesla registrations dropped to 19,046 vehicles in January and February, giving the automaker a market share of just 1.1%.
Analysts at Deutsche Bank expect first-quarter deliveries of between 340,000 and 350,000 vehicles, which would represent an 11% drop from the same time last year. However, while this decline is significant, it is far from the end of the world for Tesla. In fact, these near-term challenges may not significantly alter the company's long-term thesis, which now depends on its ability to maintain dominance in the U.S. while focusing more on other promising growth drivers like self-driving cars and robotics.
Should investors write off Europe?
It is unclear if Tesla's declines in Europe are permanent or just a temporary blip that can be reversed with new product launches such as the refreshed Model Y. Either way, long-term Tesla investors should minimize the importance of Europe in their long-term thesis.
While politics can play a role in car purchases, Europe's eagerness to vent its political frustrations on Tesla is likely not the sole cause of Tesla's recent decline in popularity. Rather, this decline may reflect a deeper anti-American mindset in the market that predates Elon Musk's relationship with Trump. Some evidence of this simmering hostility can be seen at Tesla's factory in Berlin-Brandenburg, Germany, which has been beset by protests since its opening in 2022 (even though many other factories operate in the area). It may not make sense for Tesla to continue expanding production capacity in such a volatile market.
Chinese producers are another long-term threat. To avoid tariffs, leading Chinese automaker BYD has announced a plan to make all the cars it sells in Europe locally, importing only the battery cells from China. Chinese automakers will present immense competition for Tesla over the coming years. In February, Chinese-owned car brands outsold Tesla for the first time in Europe, which is perhaps a sign of a future trend.
Focus on the U.S. market
Image source: Getty Images.
Tesla's future is increasingly tied to the U.S. market. And the Trump administration's tariff policy could become a long-term tailwind because of the company's more concentrated supply chains relative to other players in the industry. Despite sourcing 30% to 40% of its parts overseas, Tesla makes all cars it sells in the U.S. at plants in Texas and California.
Meanwhile, significant rivals such as Ford's Mustang Mach-E (made in Mexico) and Hyundai's Ioniq 5 (made partially in South Korea) could bear the brunt of the tariffs. While all car companies will likely face some operational disruption, Tesla may fare better, allowing it to pass on potential savings to consumers and gain market share.
With all that being said, the near-term uncertainty surrounding Tesla makes it hard to justify the company's current valuation. With a forward price-to-earnings (P/E) multiple of 94, the stock trades at a significant premium over the S&P 500 average of 28. While this is partially due to optimism about Tesla's ability to eventually monetize next-generation technologies like self-driving and robotics, investors may want to wait for more progress before considering a position in the stock.
