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Coronavirus Concerns Put Brakes on Tesla's Relentless Rally

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It seems like Tesla’s TSLA prolonged rally has hit a roadblock. Shares of Tesla surged more than 62% and 130% on a year-to-date basis and over the past year, respectively. The incredible run-up in its stock price since June 2019 led many industry watchdogs to believe that the stock may be due for a big correction.

The meteoric rise in Tesla’s shares is finally breaking down amid a broader market sell-off, fueled by coronavirus concerns. In the last four trading sessions, the stock price fell more than $154. It appears that the downtrend will continue for some more time.

Indeed, the U.S. EV pioneer is not immune to the broader challenges that global markets are grappling with. However, despite the massive drop in share price lately, the company’s market capitalization is still higher than that of United States’ Big 3 automakers Ford F, General Motors (GM - Free Report) , and Fiat Chrysler FCAU combined.

Coronavirus Starts to Eat Into Tesla’s Growth

Car sales in China tanked to fresh lows last month as virus breakout kept consumers away from showrooms. According to the China Association of Automobile Manufacturers, new-energy vehicles led the decline in January, with deliveries plummeting 54%.

Notably, EV sales have been witnessing decline in the country since the government scaled back purchase subsidies last July. However, Tesla has been effectively bucking the trend with solid registrations. Nonetheless,demand for Tesla cars have started feeling the brunt of coronavirus scare lately. Per China Automotive Information Net, registration for new Tesla cars in China declined 46% last month from December 2019 levels.

China’s auto market is most likely headed for a third consecutive decline in 2020 amid economic slowdown, coronavirus epidemic and trade tensions. Tesla, which had been making a big bet on China with the Shanghai Gigafactory, is likely to feel the heat of coronavirus crisis. The firm is quite dependent on the Gigafactory 3 for Model 3 production ramp up; however Tesla demand in China will likely be suspended until this pathogen is under control. As the company depends on China suppliers for securing automotive parts, it seems to be more exposed to China’s economy than other U.S. auto biggies.

The shutdown in China has disrupted the overall supply chain for automotive parts, which may further affect the industry if the coronavirus crisis persists for an extended period of time. In fact, in its latest annual filing, Tesla acknowledged that single-source suppliers and the coronavirus epidemic could pose material risks to business.

Was Tesla’s Rally Overdone or Will it Rebound To New Highs?

Over the past eight months, the stock has been on a tear. When the rally moves beyond logic, it’s time for a quick fact check. Tesla’s share price swell started with this electric vehicle giant reporting record delivery figure in the last three quarters of 2019, which unexpectedly met Elon Musk’s ostentatious promise of 350,000-400,000 deliveries. Other factors that drove the rally included the start of Shanghai Gigafactory construction ahead of schedule, expected production commencement from a Berlin Gigafactory by next year, Cybertruck craze, production ramp up of Model Y and the company’s impressive fourth-quarter 2019 results. In addition to increasing automotive revenues, the firm’s energy generation and storage revenues are also boosting Tesla’s prospects.Management also said that the solar storage business will one day rival the automotive segment.

All this good news has been progressively priced-in over the past eight months and has induced many short squeezes that have caused this stock to slingshot up. These hyper fast upward movements caused FOMO (fear of missing out) across the investing spectrum, and people rushed to get into this stock as it continued to skyrocket.

Tesla’s breathtaking rally was an enigma to many analysts and raised questions if the stock’s fundaments supported its market value of nearly $160 billion early this month. Importantly,the firm has never posted a full annual profit since going public. With the company still reporting annual losses in 2019, many experts believed that the stock was massively overpriced relative to its operations. Perceiving the rally as irrational exuberance, many analysts warned that the stock was due for a correction.

Certainly, the coronavirus concern is cooling down Tesla stock mania lately. While the recent sell-offs appear to be based on fears, Tesla still has extensive upside potential if firm can effectively penetrate the China market when the virus scare fades and get the Berlin Gigafactory operational by next summer as promised. With various tailwinds surrounding the stock, its long-term growth trajectory could make Tesla — which currently carries a Zacks Rank #3 (Hold) — one of the most valuable companies in the world, if it is able to continue keeping promises. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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