InvestIdeas

It's an expensive stock at the best of times, and now it's facing competition, it's facing narrowing margins and it's facing demand headwinds.

So that makes that valuation even less attractive.

Weakening demand in China is forcing the electric-vehicle maker to slow production and delay hiring at its Shanghai factory.

Its top executive for that market has been called in to help out at its newest plant, in Texas, which isn’t ramping up as planned.

The share price is under renewed pressure as Musk’s advisers weigh using the billionaire’s shares as collateral for new loans to replace Twitter debt.

Recessionary conditions in Europe.

Tesla planned to cut production on the Model Y and Model 3 production lines in Shanghai by about 20%.

Buybacks: US$5b to US$10b possible.

Tesla is now trading at 30 times projected earnings, its lowest ever, and well above the benchmark S&P 500 Index’s 17 times forecast earnings.

Risks from its billionaire CEO’s association with Twitter to falling demand in China, the world’s largest car market.

Plans to suspend output in stages at its Shanghai electric car factory from the end of the month until as long as early January.

Tesla increasingly appears to have a demand issue. The company has responded by cutting prices in China and the US (for December deliveries), and purportedly reducing production in China.

We estimate that price cuts In China and the US this quarter (Q4) will negatively Impact ASPs globally by roughly 2.6% or $1,400 per car. All else equal, this points to a 200 bps decrease In automotive gross margins.

It takes more than disruption to succeed in the long run:

Intensifying competition across its major markets has already forced Tesla to cut prices. Should the company also feel compelled to decrease production output, the market may be forced to reassess the many years of rapid and sustained growth already priced into its $526 billion market capitalization.

First, the risk of operational miscues at Tesla has grown as Elon Musk works around the clock to fix Twitter.

Second, concerns remain around manufacturing issues and the pace of sales for Tesla in China.

Tesla's stock trades on a forward price-to-earnings multiple of 32 times, according to Yahoo Finance data.

Year to date, shares have nosedived about 54%.

And lastly, competition in the EV space in the United States has only intensified this year.