Why Tesla shares may not see further big gains for now

February 12, 2020 08:45
The next big momentum for Tesla stock would come if the vehicles make successful inroads into the mass market, some observers say. Photo: Reuters

A big jump in Tesla's share price early last week has led to renewed chatter in the market on the prospects of electric cars as well as autopilot technology.

Widespread adoption of the latter is unlikely in the near future given a series of unresolved legal responsibility issues on top of the technical ones.

As for electric cars, there is little doubt now that such vehicles have a bright future. Technical and safety issues have been resolved long ago, and significant progress has been made over the years in the upgrade of battery quality by getting the batteries to last longer for every recharge.

The next trigger for electric car plays, from the stock investor perspective, would be inroad of those vehicles into the mass market.

Bloomberg used to release electric vehicle sales data but stopped updating since 2015.

Instead, there are continued statistics on fuel demand displacement which measures how much traditional fuel (gasoline or diesel) has been displaced by the electric vehicles. The data, under Bloomberg New Energy Finance, is released on an annual basis.

The amount of global fuel demand displaced due to electric vehicles is presented on a logarithmic scale where the slope of each curve shows the percentage change over time.

Looking at the world demand trend, there was a structural break at 2010 which marks the breakthrough of the technology. From then on to 2013 was a fast-growth period, while after that the growth slows down to a steady pace.

US has been the leader ever since whereas European countries are the followers. The interesting part is in Asia, where Japan’s growth is slowing down while that of China is catching up, almost reaching the level of the US by last year. However, note that China’s growth pace slowed down in 2017.

On Tesla there are two points to bear in mind. First, China has quite a few local electric vehicle producers competing with the US electric car brand.

Second, as a luxury item, the auto industry is highly sensitive to economic cycles. At the moment the macrocosmic picture of China is rather uncertain, and this certainly poses a big threat to the industry.

Overall, taking into account the various factors, further price-jumps in Tesla shares seem unlikely in the near term.

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The author is Adjunct Professor in the Department of Economics and Finance, City University of Hong Kong and previously the chief economist of a bank. (facebook.com/kachung.law.988, [email protected])