Why Tesla Stock Dropped Today | The Motley Fool

What happened

Shares of Tesla (TSLA +1.73%) dropped Tuesday morning along with much of the rest of the market. As of 1:15 p.m. ET, the electric vehicle (EV) leader's stock was down by 3.6%, and the threat of increased competition was at least partially to blame. At that point in the session, the tech-heavy NASDAQ Composite index was down by a similar 3.7%.

So what

Tesla shares still trade at what would be considered a sky-high valuation by traditional metrics. That valuation is based on the company's growth potential, of course, and it's rapidly expanding its production capacity as the electric vehicle market grows. So it didn't help when an analyst said he thinks a formidable competitor could take some market share from Tesla. The company in question surpassed Tesla as the world's top seller of EVs in the first half of 2022 if one also counts plug-in hybrid models. 

Image source: Tesla.

Now what

Warren Buffett-backed BYD sold 641,350 "new energy" vehicles in the first half of this year, compared to Tesla's 564,743. The China-based vehicle and battery manufacturer combines its fully electric and plug-in hybrid sales in the "new energy" category. And BYD already has a small foothold in the U.S., where it builds electric buses. Barclays analyst Jiong Shao thinks BYD will increase its international expansion and fight for share in the U.S. market, according to an article published Tuesday by Barron's. 

Expand

NASDAQ: TSLA

TeslaToday's Change(1.73%) $7.46Current Price$438.90

Key Data Points

Market Cap$1.4TDay's Range$432.64 - $439.8052wk Range$214.25 - $498.83Volume1.5MAvg Vol78MGross Margin17.01%

Tesla is quickly ramping up its output from two new factories in Texas and Germany, and anticipation of its higher vehicle production is a major reason traders have bid the stock up to a price-to-earnings (P/E) ratio of more than 100. Even with those growth prospects, its forward P/E remains at nosebleed levels. 

That's because investors expect the EV leader to continue growing strongly for many more years. The company itself expects its EV production to increase by 50% annually for at least the next several years.

Everyone knew competition was coming in the EV market, though. Both established automakers and start-ups are ramping up their EV production in the U.S. If a global leader in the category expands its presence in this country, Tesla's growth might be impacted, and that headwind has not been factored into its current valuation.