Why Tesla stock fell today

What happened

Good news for You’re here (NASDAQ: TSLA) investors! The demand for electric vehicles in China is apparently so strong that Tesla has decided to invest $ 188 million to increase the production capacity of its Shanghai plant. It’s so high that Tesla is putting 4,000 more people on the site’s payroll, as Reuters reported on Friday morning.

So why did Tesla stock trade down 2% at 11:37 a.m. ET on Friday?

Image source: Getty Images.

So what

On the one hand, this sounds like optimistic news. Tesla initially wanted its Shanghai plant to produce 500,000 cars per year – and it already has the capacity to make 450,000 Model 3 sedans and Model Y crossovers per year. The move is a testament to CEO Elon Musk’s confidence that even 500,000 vehicles a year will soon not be enough to meet the demand for Teslas in China and the European markets that its Chinese plant also supplies.

And yet Europe can also be part of Tesla’s problem. As Reuters also reported on Friday, the automaker just withdrew its request for state support for the construction of a battery plant near Berlin, Germany. Tesla had previously asked the Federal Ministry of Economics and the Brandenburg Ministry of Economics for some $ 1.3 billion in subsidies for the plant. But citing his belief that “all subsidies should be eliminated” from the electric car industry, Musk says he is now prepared to forgo that state support – and hopes governments will also eliminate “massive subsidies. for oil and gas “.

Now what

So we end up with a sort of “bad news, good news” situation in Germany. On the one hand, Tesla is forgoing $ 1.3 billion that would have essentially fallen directly to its bottom line, as the German government took part of the bill for the automaker’s capital expenditure.

On the other hand, Tesla is making it clear that it doesn’t really need these grants anymore. Over the past 12 months, it has generated free cash flow of $ 2.6 billion and GAAP (generally accepted accounting principles) earnings of $ 3.5 billion. By forgoing this subsidy, Tesla acquires a bit of moral authority by urging governments not to subsidize rivals such as Rivien, Lucid, and other electric vehicle companies that have not yet reached profitability (and also to suspend subsidies to oil companies).

For now, investors seem to be focusing on the negative aspects of the news. Longer term, however, I suspect Tesla’s decision to drop this subsidy will prove to be a smart move that will only make the company a stronger competitor.

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Rich Smith has no position in the stocks mentioned. The Motley Fool owns shares and recommends Tesla. The Motley Fool has a disclosure policy.

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