Since early June, when Tesla (NASDAQ:TSLA) stock sunk below $180, TSLA shares have been on a mostly upward trend. Yet this looks more like, well, a “dead cat bounce.”
Keep in mind that — for the year so far — TSLA stock is off about 31%. Furthermore, when you take a longer view of Tesla stock, say during the past five years, the average return was -3.89%.
Despite all this, the company has plenty of devoted fans. And yes, there are good reasons for this. The fact is that TSLA is obsessed with innovation. Because of this, the company has been up the game of old-line automakers like General Motors (NYSE:GM) and Toyota Motor (NYSE:TM).
TSLA has also been getting lots of traction with market share, with about 15% of the sales of luxury cars in the U.S. (It’s actually a hefty 46% in California.) For this year, Tesla forecasts the delivery of 400,000 vehicles (although, this does look like a stretch goal).
Another thing to consider: TSLA has a thriving battery business. Interestingly enough, it has become a significant revenue driver as the company continues to snag larger customers.
And finally, with sophisticated tech systems, TSLA continues to accumulate large amounts of valuable data. This has not only helped with improving the autonomous driving capabilities but has opened up new business opportunities. The most recent example of this is the company’s foray into the insurance business, which will initially be targeted in California. With the data advantage, TSLA will be able to offer major discounts on premiums — but still allow for a potentially lucrative revenue stream.
The Issues With TSLA Stock
So with all the positives, why has TSLA stock been in a funk? Could it be that investors are missing the story here? Or perhaps there are some real issues?
Well, I think the bears have the better arguments. For example, there are some tough macro headwinds. With oil prices languishing, there has been less of an advantage for EVs.
It also does not help that global economic growth is trailing off. In such an environment, it will be tough to gin up demand for EVs. Note that during July there was a 14% drop in global EV sales (this was the first decline ever recorded), based on data from Sanford C. Bernstein. It looks like a key was a scaling back of subsidies in China. But there was still a drop in North America.
Yet perhaps the biggest issue with TSLA is the baggage from its $5 billion acquisition of SolarCity, which was struck in 2016. At the time, there was certainly lots of skepticism. The founders of the company, Lyndon and Peter Rive, were cousins of TSLA’s CEO, Elon Musk. Tesla, Musk and SpaceX also had major debt holdings in SolarCity.
And besides, why get into the solar business, which is intensely competitive, in the first place?
But Musk thought all this was overblown. He made various statements on how SolarCity would be a strong growth driver.
However, since the deal, things have not turned out so well (just look at a recent piece in Vanity Fair). Consider that SolarCity continues to generate losses and requires large amounts of cash to finance the upfront costs for leases. The company has also suffered from a drop in market share, from about a third of the residential category to a mere 7% (this is according to Wood Mackenzie).
Then there was the recent lawsuit from Walmart (NYSE:WMT), which has alleged that SolarCity panels have resulted in seven fires at its stores. The company is now demanding the removal of the solar panels in over 240 locations.
Bottom Line On TSLA Stock
Now, TSLA has definitely been a agent of major change in the auto industry. There’s little doubt about this. But again, the SolarCity deal is likely to weigh on the operations, in terms of the continuing losses, heavy debts and distraction. In the meantime, there is the potential slowing of the EV market as well as emerging competition.
Given all this, TSLA stock looks like something to avoid.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.