Last April, Tesla’s sales for its “made in China” cars fell by 20% from the previous month – from 89,000 to 61,000. That large of a drop in sales from one month to the next is highly unusual, to say the least. And for Tesla, whose biggest factory is in Shanghai and accounts for roughly half its total production, it’s pretty much a disaster…
So no surprise that Tesla founder Elon Musk hopped on a plane and flew to China to see if he could get a little help from China’s government.
Musk came back with all kinds of goodies from his trip – including a “promise” that China would grant Tesla a license for Full Self-Driving (FSD) probably by April 2025. Tesla China factory shipments did recover after that April 2024 trip, as you can see on this handy chart from Bloomberg:
You can also see that Tesla shipments have fallen off a cliff since challenging their highs in December 2024.
It’s been obvious to us at Outsider Club for some time that Tesla and other American companies that do a lot of business in China are in a tight spot. As the U.S. steadily ratchets up trade restrictions and now tariffs on China, American companies in China are pretty easy targets.
Apple’s iPhone sales in China have been dropping, GM took a $5 billion charge to restructure its China business, Starbucks is mulling selling a portion of its China business…
Now that Elon Musk is deeply embedded in the Trump administration, Tesla might have an even bigger bullseye on it.
The Financial Times is suggesting today that China might threaten FSD permitting for Tesla as leverage over Elon Musk.
I have no inside information if this is true or not, but it would be a pretty obvious move.
Tesla: The Weak Link of the Mag 7
When I was figuring out my S&P 500 forecast for my Predictions 2025, Tesla figured prominently. Tesla shares had rallied from $275 after election day to a high of $479 on December 17, 2024…
Two days later, on December 19, 2024, my Predictions 2025 article was published, and I quote:
“…the Magnificent 7 companies (Amazon, Microsoft, Tesla, Google, Apple, Meta and Nvidia) are the key [to S&P 500 earnings]. If there’s a weak link in the Mag 7, it’s Tesla.
Tesla trades for 15X revenue. You could look at Nvidia valued at 30X revenue and think Tesla doesn’t look so bad. But each company did roughly the same amount of revenue over the last 12 months ($96 billion for Tesla and $96 billion for Nvidia) – yet Tesla reported $14 billion in EBITDA and Nvidia reported $60 billion in EBITDA. That gives Nvidia a somewhat reasonable forward P/E ratio of 30, while Tesla sits at a very unreasonable forward P/E of 140.
Betting against Elon Musk has not worked for anyone (except over short time frames). And I am not advocating that you do so now. However, Tesla is grossly overvalued, and that matters for my forecast…because of sentiment…
Investor sentiment is what drives P/E ratios (how much investors are willing to pay for earnings). Coming into 2024, I was convinced that investors were underestimating the power of the Mag 7, that investor sentiment would improve, and that P/E ratios would move higher.
The opposite is true for 2025. The average analyst price target for the S&P 500 in 2025 is 6,678. That’s too bullish…
My 2025 S&P 500 target is 6,325. “
Looking back, sure, I wish I hadn’t been hesitant to recommend a short on Tesla, or maybe some put options. The stock has been whacked.
And even though it’s down $130(!) from those December highs, it still trades with a forward Price-to-Earnings ratio of 120. General Motors’s (NYSE: GM) forward P/E is 4.
Regardless of how U.S./China trade relations go, no matter if Tesla gets FSD permission or not, in my opinion, the stock remains grossly overvalued.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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