What is your opinion of Tesla Inc. TSLA-Q now that the stock seems to have bottomed out? Is this a good time to take a flyer or would you stay on the sidelines?
I wouldn’t take a “flyer” on any stock, let alone one as volatile as Tesla. That’s gambling, not investing. Even though Tesla’s shares have dropped by more than half from their record high of more than US$400 in 2021, the risks facing the company are only growing. Here are five reasons I would stay far away.
Sales and profits are falling
Tesla is being squeezed on multiple fronts. Demand for electric vehicles is softening as consumers show a preference for hybrids, which offer energy-saving and environmental benefits without the range anxiety of pure EVs. At the same time, Chinese companies such as BYD – the world’s largest EV maker – are producing and selling electric cars at a lower cost, which has prompted Tesla to slash the prices of its models multiple times, eroding its profit margins. In the first quarter, Tesla’s automotive revenues tumbled 13 per cent year-over-year to US$17.38-billion, and net income sank by more than 50 per cent to US$1.13-billion, or 34 U.S. cents a share. How the company will reverse this slide is far from clear.
The valuation is still too high
Despite the stock’s huge decline and Tesla’s deteriorating results, the shares still trade at about 70 times estimated 2024 earnings. Ford Motor Co. F-N and General Motors Co. GM-N, by comparison, have price-to-earnings multiples in the single digits. With Tesla showing no clear path to resuming growth, analysts have become increasingly pessimistic, with hold and sell recommendations now outnumbering buys by about 50 per cent. The average stock price target has fallen to about US$180, which is only slightly above Teslas’s closing price of US$168.47 on Friday.
Tesla’s strategy is a Hail Mary
How will Tesla get out of this jam? To hear Tesla CEO Elon Musk tell it, the answer is simple: robotaxis. On Tesla’s first-quarter conference call in April, Mr. Musk sketched a future in which millions of fully autonomous Tesla vehicles will ferry passengers around.
“Think of it as a combination of Airbnb and Uber, meaning that there will be some number of cars that Tesla owns itself and operates in the fleet … and then there’ll be a bunch of cars where they’re owned by the end user. That end user can add or subtract their car to the fleet whenever they want,” he said.
If that sounds familiar, it’s because Mr. Musk was saying the same thing in 2019 when he promised that Tesla robotaxis – or “Cybercabs,” as the company calls them – would be on the road by the middle of 2020. Four years later, robotaxis still face myriad technological and regulatory hurdles before widespread adoption can occur. It’s worth noting that, a decade ago, Mr. Musk also predicted that humans could land on Mars as early as 2024.
Here on Earth, safety remains a major hurdle for Tesla. Videos abound online of Tesla vehicles braking suddenly, crashing into parked cars or travelling down the wrong side of the highway. Even as the company prepares to unveil its first robotaxi in August, Tesla is facing multiple lawsuits over crashes tied to its Autopilot feature. It is also the subject of a U.S. Department of Justice probe into its self-driving vehicle claims.
The executive suite is in turmoil
With its profits tumbling, Tesla announced in April that it will lay off 10 per cent of its work force globally, which represents an estimated 14,000 job cuts based on the company’s head count at the end of December. Many top executives have also departed recently, including the senior director of human resources in North America, the head of its Supercharger division, the director of new product introduction, the vice-president of investor relations, the senior vice-president of powertrain and electrical engineering and the vice-president of public policy and business development. How the company plans to grow while gutting its employee and executive ranks isn’t clear.
Musk’s erratic behaviour is a red flag
It’s not just the sheer amount of time Mr. Musk spends on X – the social media site formerly known as Twitter, which he acquired in 2022 – that worries investors. It’s the nature of what he posts. In recent weeks, he has shared, among other things, a meme comparing climate activists to communists, a video in which former Fox News host Tucker Carlson alleges “systemic racism … against whites,” and a picture of a dog dangling its private parts on the face of another canine.
The dog meme was in response to tech billionaire Dustin Moskovitz, who had accused Tesla of committing “consumer fraud on a massive scale” by overstating the range of its vehicles and the capabilities of its full self-driving (FSD) software. Mr. Moskovitz, a long-time Tesla critic, also suggested the company is heading for the same fate as Enron Corp., which filed for bankruptcy in 2001 after it was exposed as a massive accounting fraud. Without addressing Mr. Moskovitz’s allegations directly, Mr. Musk called him a “retard” and a “pompous idiot,” among other things that can’t be repeated in a family newspaper.
A self-proclaimed “free speech absolutist,” Mr. Musk is free to post all the off-colour memes, sophomoric insults and conspiracy theories he wants. But investors are also free to question whether he has the temperament and managerial chops to lead Tesla through perhaps the most challenging period in its history. Given Tesla’s collapsing sales and profits, the intensifying competition it faces, its excessively rich valuation and the uncertainties surrounding the next phase of its growth, investors would do well to steer clear of the company.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.