Electric vehicle giant Tesla (NASDAQ:TSLA) reported blow-out fourth-quarter earnings a couple of weeks ago. Despite its stellar performance, TSLA stock nosedived more than 11% in January.
It’d be east to point to Tesla’s revelation that it won’t be releasing new models this year as the reason behind the drop. However, multiple challenges are facing TSLA stock which point to a rocky road for its investors.
Talking about Tesla’s fundamentals seems redundant. We’ve read about how stockholder gains eventually match business gains, but that just hasn’t been the case with Tesla. Its share price is completely divorced from its fundamental value and trades at mind-boggling price metrics.
Stock returns for Tesla appear to be slowing of late, and all signs point to a rough time ahead. With incumbent EV companies getting closer in the rear-view mirror and with the challenging macro-economic conditions, it’s tough to bet on TSLA stock.
The Red Flags on TSLA stock
TSLA stock has been an anomaly from the get-go. It’s always been tough to make a straight-faced argument about why the price has performed the way it has. Though its first-mover advantage in the EV market is huge, to justify a 23,000% return in the past decade is asking too much. Moreover, with new electric vehicle makers coming in each year, it’s getting tougher and tougher for Tesla to wow its investors.
Incumbent EV automakers have been spending billions building their presence in the sector. Moreover, automakers apart from Tesla accounted for over 80% of global EV sales during the first half of last year.
Additionally, its eccentric founder’s claims about its ability to diversify continue to get more outlandish. None of the businesses outlined by Elon Musk, such as the CyberTruck, solar panels, or robots, have produced any noteworthy profits. Its diversions have allowed some of its peers to grab a bigger slice of the EV pie in the process.
Manufacturing isn’t easy, and Tesla’s woes have been well documented in this department. More importantly, it’s costing a truckload to the company and still hasn’t been able to devise a more cost-effective strategy. It has made $7.3 billion in capital investments in the past year, while its cash flow has been at just $9.9 billion. Looking ahead, it will continue to have a strong need for more investment limiting the cash flows needed to payout to its shareholders.
The Consumption Bust
The U.S. economy enjoyed the largest fiscal stimulus over the past couple of years. However, the bill is now coming due this year, likely to force a major reversal in consumption and real income.
Inflation has run rampant across the economy and is pacing at its highest in over four decades. Consumers and politicians are all panicking over the soaring prices, which has forced the Federal Reserve to tighten its monetary policy. This development points to the slowing down of the economy and beckons the question about the long-term costs of the stimulus.
The stock market has also been sending warning signals, with several high-profile growth stocks bearing the brunt of the slowdown. High-risk assets are in for a backbreaking time ahead, which is a situation that may continue for a long time.
Bottom Line on Tesla Stock
Tesla stock has been arguably one of the most rewarding investments for its shareholders. There’s plenty to like about the company, but unfortunately, its valuation throws most of its positives out of the window. Perhaps more so, with the tricky situation, it faces currently, the stock is in for a challenging time ahead.
Or, as Loup Venture’s Doug Clinton wrote on his always-insightful blog last month — “Tesla makes fine products. That’s not the problem. The problem is what the price of the stock demands in terms of future performance.”
Nevertheless, it still trades at a price that’s over 93 times its cash flow. Hence, it’s best to avoid TSLA stock.
On the date of publication, Muslim Farooque 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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
