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The price of Tesla stock has gone down 10% this month as macroeconomic headwinds have kept weighing on the valuation of equities in the United States and other latitudes.

The market appears to now be pricing a 75 basis points rate hike during today’s meeting of the FOMC. This would be the highest single-meeting hike since 1994 and may accelerate the negative momentum for equities as officials from the Federal Reserve have said multiple times that they are planning to rate hikes in every meeting this year.

This higher-than-expected hike comes on the back of a hot inflation report for May that is scaring consumers, investors, and policymakers alike.

For stocks like Tesla, whose valuation has been a topic of heated debate in the past after it surged to $1 trillion in less than a year, higher rates mean higher risk premiums and lower equity prices.

However, the majority of analysts from Wall Street are still bullish on the firm headed by Elon Musk and that might be a good sign for the long-term performance of the stock.

Can the trend for Tesla stock reverse at some point this year? In this article, I’ll dig deeper into the price action and fundamentals of TSLA to outline plausible scenarios for the future.

Your capital is at risk.

Tesla Stock – A Closer Look at the Price Action

tesla price chart
Tesla (TSLA) price chart – Source: TradingView

The chart above shows that Tesla has been on a sharp downtrend since November last year after the Federal Reserve started to adopt a more hawkish approach to its monetary policy on the back of increasingly hot inflation readings.

Lockdowns imposed by Chinese authorities on some key cities within the country also contributed to increase the stock’s volatility as Tesla’s factory operations were disrupted by the incident.

In addition, reports started to circulate a month ago about the company having difficulties procuring the required materials to assemble its electric vehicles in the Asian country due to mobility restrictions. Sources stated that output declined from 1,200 vehicles a day to just 200 units amid this lack of supplies.

For Tesla (TSLA), the $600 level remains the most relevant support area nearby in case the price keeps diving. It seems plausible to expect that those levels will be reached if the Fed’s comments continue to be hawkish and point to more upcoming hikes aside from the 75bps increase the central bank is expected to implement today. That results in a downside risk of 9.4% based on yesterday’s closing price.

Momentum indicators are favoring a bearish outlook as the Relative Strength Index (RSI) has failed to climb above 50 for more than a month now while the MACD remains neck-deep into negative territory and seems poised to cross below the signal line.

The consensus recommendation from analysts surveyed by MarketBeat stands at hold even though half of the firms have rated the stock a buy. Meanwhile, the average price target for TSLA stock is standing at $893.5 per share resulting in a 34.8% upside potential if that target is hit.

What About Tesla’s Fundamentals?

Tesla’s sales have been growing quite rapidly in the past five years moving from $11.8 billion to $53.8 billion from 2017 to 2021.

Meanwhile, the firm’s operating results have also been improving. During the first quarter of 2022, the company produced $3.6 billion in GAAP operating income resulting in a 19.2% operating margin as its automotive gross margin rose to 32.9%. During that same period, free cash flows once again stood above $2 billion.

By the end of this period, Tesla had long-term debt (including financial leases) of $3.8 billion on total assets of $66 billion including $18 billion in cash, equivalents, and marketable securities.

The management has demonstrated its ability to execute its ambitious plans including the inauguration of various gigafactories.

Even though this quarter’s performance might be temporarily affected by China’s lockdown measures, Tesla has proven that it can produce free cash flows of over $2 billion per quarter which leaves us with a forward P/FCF ratio of 86x by using a simple run rate of this metric along with the current market capitalization.

This is a relatively lofty valuation metric in today’s challenging macroeconomic environment. Tesla would have to prove that it can keep growing its cash-flow generation capacity pretty soon or the negative volatility seen this year may spill over to 2023.

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