Should I Invest in Tesla Stocks or Not
Tesla (TSLA) Chief Executive Elon Musk has defied big odds and consistently beat expectations since taking the helm of the electric vehicle manufacturer in 2008. Now, with sales recently falling and the stock price on a decline since its peak of $900USD, along with the launch of its Berlin plant behind schedule, is Tesla stock a buy?
Musk wants to eventually build 20 million electric vehicles a year over the next decade. That’s more than double the current production of other auto-making giants. So it’s now on a mission to rapidly expand its manufacturing capabilities.
The expansion includes the construction of its third manufacturing plant near Berlin, where it will produce the Model Y. Which is behind in schedule.
On top of this, Tesla will build its fourth manufacturing plant near Austin, Texas. That factory will be Tesla’s largest, built on a 2,000-acre chunk of land. It will produce the Cyber truck and its big-rig truck called Semi, as well as the Model Y and Model 3. Tesla recently said Cyber truck deliveries won’t begin until early 2022, later than the official target for a late 2021 launch.
“What people don’t know is that the EV revolution is now being led by China and Europe where sales and government EV tax incentives are much stronger, It’s competitors are announcing exciting new vehicles and models and this is where Tesla now is starting to fall behind.
Tesla is, in many ways, a stock that’s in a class by itself. In saying that, when you consider the stock and what it has been doing over the last 6 months, and with a 52-week high of about $900 a share and a current price in the low-$600s, it may be possible to make the case that Tesla hasn’t just slowed down but has actually shifted into reverse.
That may not be great for the bulls to hear, but it’s an important starting point.
Tesla has long been a company that divides opinions. And that’s putting it politely. Rewind two years and every investor with an opinion on this company seemed to be in one of two camps. One camp supports Tesla and believes that it will be a company that will one day overtake Amazon with CEO Elon Musk at the helm. The other camp believed that Tesla was the world’s biggest scam, Musk a conman and that the company will eventually go to zero.
Well, back in the present, the debate still isn’t too different. Yes, Tesla has proven itself to be able to consistently grow while becoming profitable. But for many people in the second camp, the US$656 billion market capitalisation that this company now commands (more than Toyota, Volkswagen, General Motors and Ford combined) is the new problem.
But the performance of the Tesla stock price over the past year or so has kept delighting its fans, and confounding its critics. Tesla shares are now up close to 500% over the past 12 months. And up more than 1,100% over the past two years.
It’s been a bandwagon many investors have been sorely tempted to jump on – and many have. But jumping on the said bandwagon after 1,100% gains in two years is not for the faint of heart in any investment. And Tesla shares, despite their success, remain highly volatile.
But I’m not here to cheer for the stock. Instead, I’m going to be the bad guy by highlighting two obvious risks Tesla bulls have either neglected — or chosen to ignore.
1. Tesla is not the only game in town
The end of gasoline-fueled cars as a major industry draws closer every year. Battery technology is improving, making EVs cheaper than ever. Governments are putting more support into electric cars at the expense of petrol cars. However, while Tesla has had a head start, it’s far from being the dominant EV player.
For one, Tesla faces serious competition from the likes of China’s BYD which has sold EVs since 2008 and makes its own battery. According to popular EV blog Electrek, Tesla’s and BYD’s sales have been neck-and-neck for years.
BYD which counts Warren Buffett as a major backer is benefiting from China’s low-cost engineer workforce as well as government support for EVs. And BYD’s newest model the Han goes head to head with Tesla’s best-selling Model 3 in terms of price and range.
Meanwhile, traditional automakers like Toyota, Volkswagen, and General Motors are not sitting still. For instance, Toyota recently said it’s making a 310-mile-range electric car that takes just 10 minutes to reach a full charge. Now that is something that can change a petrol head over to electric.
As more and more automakers old and new charge into the EV industry, there’s a good chance we’ll end up with a fragmented market, not unlike the traditional auto industry. That is bad news for Tesla’s 18% market share.
2. Tesla is trading at absurdly high valuations
Tesla is probably the most expensive carmaker that has ever existed.
At roughly $621 per share (at the time of writing), Tesla’s market capitalization is $622 billion. To put things into perspective, General Motors, Ford, Toyota, and Volkswagen together sold more than 30 million cars in 2019. Tesla sold around 368,000 cars.
Investors have also thrown caution to the wind. Many of Tesla’s new ventures are still at early development stages and there’s no telling how they’d turn out. Similarly, while he’s a capable leader, that’s no guarantee Musk will always be successful.
Should investors risk their hard-earned cash on Tesla?
There is no doubt Tesla is one of the world’s most interesting companies. By leading the charge into electric cars, renewable energy, and other potentially disruptive industries, Tesla’s given investors plenty of room for imagination.
But it is also this sheer imagination driving Tesla shares to trade at over 20 times trailing revenue. To put things into perspective, General Motors a leading car manufacturer trades at less than 0.5 times revenue.
Frankly, I have no idea what Tesla will become over the next decade. Will it be a leading electric carmaker or a major player in renewable energy and mobility? Should Tesla turn out to be the latter, its current price might be justifiable. Otherwise, we could see a severe contraction in valuations.
A key question to ask is: Should investors risk their hard-earned cash on well-told stories that may or may not materialize? My answer is a resounding no.
Should you invest $1,000 in Tesla, Inc. right now?
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