Whenever Tesla (NASDAQ:TSLA) bears point out how overvalued TSLA stock is, there is one main rebuttal. Tesla isn’t an auto stock. It’s a tech stock.
Tesla bulls say Tesla isn’t like $48 billion Ford (NYSE:F). Tesla is more like $2.1 trillion Apple (NASDAQ:AAPL), they say.
I actually believe comparing Tesla to a smartphone maker is a fair analogy. However, I don’t think Apple is the proper analog. I believe TSLA stock is more like BlackBerry (NYSE:BB) than Apple.
TSLA Stock as a Tech Investment
I completely understand the argument for Tesla as a tech stock. Apple was once a hardware company, and it is transitioning to a services company.
Step one was to sell a bunch of iPhones, and step two is to sell customers subscriptions on those iPhones. Tesla is attempting to sell customers cars and then sell them subscriptions and other services tied to those cars. These services include things like self-driving software, insurance and other services.
There are several key differences between the iPhone and the Model 3. First, the iPhone has always been tremendously profitable. Tesla has yet to prove it can sell its cars at a profit without relying on regulatory credit sales.
However, the bull thesis is that if Tesla can essentially break-even on its low-margin auto sales, services revenue has a much higher margin. It can theoretically be tremendously profitable over time.
From the fourth quarter of 2015 to the fourth quarter of 2020, Apple’s services revenue has skyrocketed from around $5 billion to around $14.5 billion.
Apple recently said there are about 1.65 billion Apple devices in use around the world. In other words, Apple has added more than $6.30 in services revenue per device per year to its business in just the past five years.
Another way to look at it is that Apple generated about 35% more services revenue alone than Tesla’s total revenue last quarter.
History of Smartphones
The idea for TSLA stock bulls is to ignore Tesla’s barely profitable auto business as it builds its user base. Once there are billions of global Tesla owners like there are iPhone owners, Tesla will milk those users for all they’re worth via service offerings. Therefore, the profits are coming eventually.
However, it’s important to remember how Apple built its massive user base. The first iPhone launched back in 2007. As of mid-2009, BlackBerry (then called Research In Motion) held a 55.3% share of the U.S. smartphone market. Apple was a very distant second with just 19.5% share.
But as everyone who was around at the time remembers, the iPhone was a much better device. Eventually, the market share numbers shifted to reflect customers buying the superior product. By the end of 2019, Apple had 49% of the U.S. smartphone market. BlackBerry’s share is essentially now zero.
Tesla currently has about an 80% share of the U.S. electric vehicle market, but there is virtually no competition at this point. General Motors (NYSE:GM) is planning to launch 30 new EV models by 2025. Other automakers are expected to launch at least nine new EV models by the end of 2021.
Like BlackBerry, Tesla had a first-mover advantage. J.D. Power just ranked Tesla 30th out of 33 vehicle brands in dependability. Tesla is also way behind companies like GM and Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) in autonomous vehicle technology, according to Navigant Research.
It Could Get Ugly
Apparently, I’m not the only one who sees similarities between BlackBerry and Tesla. LP Research analyst Gordon Johnson recently drew the same conclusion.
“We see Tesla more as BlackBerry versus Apple,” Johnson says. “If we move to the world’s largest EV market where competition is the strongest, Europe, their market share last year fell from 30% to 10%. Their sales actually declined total in Europe by 10%.”
Speaking of market share, Morgan Stanley just reported Tesla’s share of the U.S. EV market dropped from 81% to 69% in 2020. The firm said 100% of that market share loss came from just one competing vehicle–the Ford Mustang Mach-E.
If that’s how much market share Tesla loses to just one competing model, imagine what could happen when dozens more roll out in the next several years.
How bad could things get for TSLA stock if it loses its first-mover advantage? BlackBerry’s stock price fell from as high as $88 back in 2008 to under $7 per share within three years, a more than 90% drop.
With TSLA stock trading at $653, Johnson’s price target for Tesla is currently $67, representing a potential 90% drop.
Tesla may eventually prove it is the next Apple. But all it has proven up to this point is that it is like BlackBerry. And things didn’t turn out very well for long-term BlackBerry investors.
On the date of publication, Wayne Duggan held long positions in GOOGL and GM.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.
