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Tesla share price on watch, nearing key support level

With Tesla’s share price having fallen 32% from its all-time high at the start of the year, what may be on watch?

What is weighing on Tesla's share price last week?

An unsubstantiated report last week suggested that Tesla‘s monthly net orders in China may have dropped to about 9,800 in May from more than 18,000 in April. This comes against the backdrop of increased government scrutiny in China, with several high-profile car crashes potentially fuelling safety concerns.

China represents a crucial market for Tesla Inc by accounting for an increasing share of the carmaker’s total revenue over the years. Total revenue from China currently accounts for close to 30% of overall revenue and remains its highest-growth geographical market.

The recent report seems to support the dent in China demand, coming at a time where Tesla's China registrations fell 65% month-on-month in April based on data from China Automotive Information Net. The pressure on orders may potentially linger over the next few months as Tesla copes with the impact on their branding, with local EV competitors hot on their heels.

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What else to watch?

Elsewhere, emerging competition in the electric vehicle space may continue to pose a threat for Tesla Inc. In Europe, Tesla faces Volkswagen who has laid out plans for six cell-production gigafactories by 2030. In the US, while Tesla is still the dominant player, Ford and General Motors may be one to watch.

As competition intensifies, Tesla may need to tackle challenges in securing its market share. Higher cost pressures from operating expenses such as R&D costs may continue to increase while greater variety of products in the market may put a cap on price increase.

Investors’ concerns may also revolve around Tesla’s reliance on credit sales to deliver profits. Its latest quarter’s sees a 46% YoY increase in regulatory credits to US$518 million, without which Tesla’s earnings may still be in negative territory.

Tesla’s valuation

Tesla’s forward EV/sales currently stands at 10.5, commanding a significant premium over the automobiles industry average of 4.9 and the consumer cyclical sector average of 2.7. This suggests that investors have set high expectations for Tesla’s future growth, considering that its five-year historical revenue growth of 50.8% towers above the automobiles industry of 13.4%.

Currently, analysts’ views towards Tesla remain divided. The stock has 19 ‘buy’ recommendations, 13 ‘holds’ and 12 ‘sells’. The Bloomberg 12-month consensus target price of US$625.18 suggests a potential 4.4% upside from the closing price of US$599.05 at the time of writing.

Technical analysis

Tesla’s share price seems to fall within a descending triangle pattern, with a crucial base support level at US$545 in the near term. Prices have tested and rebounded off the US$545 level on previous three occasions and a price close below this level may potentially draw further downside to the next support level at US$460.

That said, last Friday’s price action sees the 200-day MA holding up for now, with a higher lows on the MACD indicating some upside momentum. Should price move higher, one may find resistance at the US$650-660 region from both its 50 and 100-day MA, along with the upper trendline of the descending triangle.

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