Two years ago or so, Tesla (NASDAQ:TSLA) was the most polarizing stock on Wall Street. Elon Musk’s fans could see no wrong in their leader’s automobile company. Meanwhile, bears and short sellers spent endless amounts of time documenting every possible negative thing about TSLA stock.
Recently, however, Tesla has gone to the back-burner. Active traders have turned their attention to meme names such as GameStop (NYSE:GME) or cryptocurrencies. Short sellers have gone elsewhere as well, seemingly realizing that Tesla simply isn’t going to crash anytime soon regardless of how many negative blog posts or tweets they publish.
As of this writing, TSLA stock is down to a short interest of just 3.4%. That’s quite a normal low level of shorting for a large prominent tech company. In other words, everything has changed since a time not that long ago when Tesla was the single most shorted stock in the world. Yet, while bears have given up, TSLA stock still faces significant hurdles.
Earnings Remain Profoundly Unimpressive
While Tesla the stock has been an incredible winner, Tesla the automobile manufacturer still has a lot to prove. A quick look at the financials proves this point.
For full-year fiscal 2020, Tesla generated $31.5 billion in revenues. It cost the company $24.9 billion to generate those revenues, leaving $6.6 billion of gross profit. Operating expenses consumed another $4.6 billion. Then taxes and interest payments took another billion of the profit. Add it all up and Tesla generated $690 million of net income in 2020. This isn’t an aberration due to Covid-19 either; in fact, 2020 was Tesla’s most profitable year to date as a public firm.
Given that Tesla has 1.0 billion shares of outstanding stock, earnings per share came in at just 64 cents per share. That’s positive territory. So, not too bad, right? Issue is, however, that TSLA stock is trading for nearly $800 per share. Tesla’s P/E ratio is well into the triple-digits. It’s not like the company is growing all that quickly either; it’s been a mature auto manufacturer for awhile. It’s not in its initial ramp-up stage anymore.
For comparison’s sake, Toyota Motors (NYSE:TM) generated $277 billion of revenue in 2020. It turned $44 billion of that into gross profit. Nearly half of that filtered straight through to the bottom line, as Toyota earned $21 billion of net income during the pandemic year. As a result, Toyota earned nearly $15 per share, working out to around 12x earnings versus more than 100x for Tesla.
Put even more starkly, Toyota has a market capitalization of $250 billion and earns around $20 billion of annual profits. Tesla, by contrast, has a market cap of $750 billion and barely breaks even from its operations.
Competition Is Here
For many years, Tesla had a crucial advantage: Being the first-mover. Tesla was the only serious automaker with an attractive line of electric vehicles (EVs) and the marketing and financial muscle to raise public awareness. Tesla effectively was synonymous with EVs for the better part of the 2010s.
In theory, Tesla could have obtained a dominating grip over the EV marketplace with such a huge head start. Instead, Tesla largely failed to capitalize on the opportunity. Now, a host of new EV companies have sprung up. While many of them have already flamed out, some are built for the long-haul. Lucid’s (NASDAQ:LCID) new product launch in particular is generating tons of buzz and could steal tons of customers from Tesla. As if that weren’t enough, a bunch of prominent EV firms have sprung up in China, such as NIO (NYSE:NIO), as well.
Meanwhile, the legacy automakers have hardly conceded the EV field either. It took them a few years, but firms like Volkswagen (OTCMKTS:VWAGY) and Ford (NYSE:F) are bringing electric cars and trucks to market that could swamp Tesla.
TSLA Stock Verdict
On the one hand, it’s an achievement that Musk and company so successfully fended off the short sellers and critics. Investors that kept their faith in the stock have been duly rewarded up until now.
At some point, however, you have to wonder where any further possible upside will come from. Tesla is worth far more than the world’s other major automakers. Despite that, it hardly makes any profits. And Tesla has been around long enough that its business model should have started working by now, yet it hasn’t.
With the bears defeated, there aren’t any shorts left to squeeze. On top of that, Tesla has already gotten added to the major stock indexes such as the S&P 500, checking another former catalyst off the list.
Unless Tesla starts actually generating strong profits and consistent growth, it’s hard to see what could possibly justify TSLA’s stock price at anything close to current levels. Tesla has won the sentiment battle. But it still is rather lacking on an actual fundamental basis.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.