Over the trailing-10-year period, few S&P 500 components have delivered for shareholders quite like electric-vehicle (EV) manufacturer Tesla (TSLA 10.97%). Even after a pullback that’s seen Tesla stock lose close to two-thirds of its value, shares are up nearly 5,900% in a decade.
This monumental return is a reflection of Tesla doing something that hadn’t been done in more than a half-century — namely, an automaker was successfully built from the ground up to mass production. Last year, Tesla produced nearly 1.37 million EVs and delivered a little over 1.31 million EVs (mostly Model 3 sedans and Model Y SUVs).
A charging Tesla Model S. Image source: Tesla.
Another reason Tesla became the largest automaker in the world by market cap is its push to recurring profitability. Tesla has been profitable on the basis of generally accepted accounting principles (GAAP) for the past two years and no longer needs to rely on renewable energy credits to push itself over the hump to recurring profitability.
But despite Tesla’s outperformance since going public, it’s a stock that I wouldn’t buy with free money. While recognizing that it’s North America’s leading EV manufacturer, I wouldn’t touch Tesla stock with a 10-foot pole for the following seven reasons.
1. Tesla isn’t immune to cyclical headwinds
To begin with, investors should recognize that Tesla is a cyclical company that isn’t immune to the headwinds impacting the auto industry — even if its share price has seemingly ignored this fact.
Automakers have been contending with semiconductor supply shortages, parts shortages tied to the COVID-19 pandemic, and historically high inflation. The latter has forced auto manufacturers to make a difficult choice: eat higher material costs or risk reducing buying demand by increasing prices.
The point is that Tesla is dealing with production headwinds right alongside legacy auto companies and doesn’t possess any inherent advantages as it tackles the growing likelihood of the U.S. falling into recession in 2023.
2. It lacks true branding power
Although there’s no question Tesla has found a way to resonate with EV buyers — otherwise, it wouldn’t have delivered 1.31 million EVs in 2022 — it doesn’t yet possess the branding power to connect with and engage consumers like legacy automakers. Tesla was, after all, founded just 20 years ago.
By comparison, Detroit legends, like General Motors and Ford Motor Company, have more than a century of history at their disposal. The long list of vehicles manufactured by GM and Ford can ignite memories from multiple generations of Americans and is an intangible factor that Tesla can’t compete against.
I’d also add to this point that Tesla’s lack of history and branding power makes its recent approval decline among consumers worrisome. According to U.K.-based research company YouGov, Tesla’s approval rating fell from a net-positive score of 5.9% at the beginning of 2022 to negative 1.4% by early November. Likewise, a poll from Morning Consult found that America’s opinion of Tesla as a company shifted from 43% positive and 15% negative at the beginning of 2022 to 38% positive and 22% negative by late November.
3. It really is just a car company
The third reason I wouldn’t put a dime to work in Tesla stock is because it truly is nothing more than a car company.
Tesla optimists love to point out that it has an energy business responsible for installing battery packs in homes and solar panels on roofs. The company also operates various services, including its supercharger network. But dig into Tesla’s quarterly filings — the actual 10Qs and not just the brief overview provided on Tesla’s investor relations page — and you’ll see where Tesla generates its GAAP profit.
Through the first nine months of 2022, Tesla generated 98.4% of its $15.08 billion in gross profit from automotive revenue (sales, regulatory credits, and leasing). Just $244 million in gross profit was generated on close to $7 billion in energy, storage, and services revenue.
These are low-margin, money-losing businesses once operating expenses are factored in. Tesla really is just a car company.
4. Tesla’s first-mover advantages aren’t sustainable
Another reason I want nothing to do with Tesla stock is the expectation that its first-mover advantages won’t be sustainable.
For instance, General Motors and Ford are earmarking respective $35 billion and $50 billion for EV, battery, and autonomous-vehicle research. GM and Ford each anticipate launching 30 new models worldwide by the end of 2025 and have seen strong preorders for their high-margin trucks.
Looking overseas, BYD (BYDD.F 4.62%) (BYDDY 4.87%) trounced Tesla in 2022 by selling 1.9 million combined EVs and plug-in hybrid vehicles. In particular, BYD’s alternative-energy vehicle sales ramp up has been much faster than Tesla in China, the world’s No. 1 auto market.
Even new players are beginning to run circles around Tesla. The ET7 and ET5 sedans launched by Nio (NIO 4.64%) in March 2022 and September 2022, respectively, have a 621-mile range with the top battery-pack upgrade. That’s nearly double the range of a standard Tesla Model 3.
Auto stocks are historically valued at high-single-digit price-to-earnings ratios. TSLA PE Ratio data by YCharts.
5. The valuation doesn’t make sense
The fifth reason to not buy Tesla stock (even with free capital) is its valuation. As I noted above, optimists love to value Tesla as more than a car company. But its operating results clearly show that its profitability is entirely dependent on selling EVs and, to a far lesser extent, on selling renewable energy credits and leasing its EVs.
With headwinds mounting for the auto industry and Tesla slashing the price of its flagship Model 3 and Model Y to avoid a buildup of inventory, Wall Street’s consensus earnings for the company in 2023 are falling big-time. The $5.80/share in full-year profit forecast three months ago for 2023 is now down to $4.23/share.
Even with Tesla’s stock getting clobbered over the trailing 12 months, it’s still valued at an aggressive multiple of 34 times Wall Street’s consensus earnings. Not only do I believe this earnings-per-share estimate will continue to fall throughout the year, but I see no justification for Tesla to trade at a 34 multiple in a commoditized industry where high-single-digit price-to-earnings ratios are the norm.
6. CEO Elon Musk is clearly distracted by side projects
To add to the list of reasons to avoid Tesla stock, CEO Elon Musk appears to be completely distracted by his side projects.
As many of you are probably aware, Musk closed on a $44 billion buyout of social media platform Twitter in late October. The Twitter buyout saga lasted for about half a year and has seemingly monopolized Musk’s attention since the deal closed. Even though Musk has stated that he plans to step down once a Twitter CEO successor is found, it’s perplexing that he doesn’t devote more attention to his $454 billion company that’s currently the leading EV producer in North America.
But that’s not all. In addition to his pet project Twitter, Musk is also the founder and CEO of SpaceX, the founder of The Boring Company, and the co-founder of Neuralink. If I were a Tesla investor, I’d be highly worried about my CEO’s commitment to growing the company and shareholder value.
CEO Elon Musk speaking at the China gigafactory groundbreaking ceremony. Image source: Tesla.
7. Elon Musk can’t be trusted
But if there’s one reason above all others why I’d never invest a penny in Tesla stock, it’s because I don’t trust Elon Musk. Although Musk is an innovator, his antics as CEO can’t be overlooked.
Musk has, on multiple occasions, drawn the ire of securities regulators. In fact, he’s currently defending himself in court against a class action lawsuit regarding allegations that he misled Tesla’s shareholders when he tweeted in August 2018 that he had “funding secured” to take his company private.
However, it’s the ever-growing mountain of unfulfilled promises that’s arguably even more egregious. Musk has claimed that level 5 full self-driving technology has been about “one year away” since 2014. He also proclaimed that 1 million robotaxis would be on the roads by 2020, yet not a single robotaxi is on the road today. And his forecast for when innovations or EVs will hit showrooms has consistently been wrong — e.g., the Cybertruck and Semi were delayed by years.
Tesla’s valuation is built on these promises of innovation, yet Musk has failed to deliver over and over again. That’s more-than-enough evidence for me to avoid putting any money to work in Tesla.
