Every tragic story has a turning point, where the protagonist begins an inevitable fall. For Tesla (NASDAQ:TSLA) stock, that point was the Cybertruck. Cybertruck was announced over four years ago, and I have been down on Tesla ever since. The reason is China.
Before the Cybertruck Tesla truly had no rivals. It was the first scaled maker of electric vehicles and (more important) their batteries. All it needed to do was drive down costs, continue to scale, and deliver cars for the global mid-market. Instead, Cybertruck.
TSLA Stock and Mid-Market EVs
The challenge China accepted, the one Tesla (and other American nameplates) rejected, was to build a mass market car for the mid-market. The mid-market, in this case, represents folks like me who can afford $25,000 for a Toyota (NYSE:TM) Corolla but don’t want to pay much more.
This is in line with the industry’s strengthening economics. EVs are tech in that their price will decline over time. With 40% of the cost in the battery, an engine being a generator running in reverse, this is inevitable. Once the required software is perfected (and we can argue about what’s necessary), those costs will decline with Moore’s Law.
What’s left is a simple machine that the swells might doll up, but that middle class buyers will see as utilitarian.
BYD (OTCMKTS:BYDDF) took the lessons Tesla taught China and is building what Tesla should have built. The BYD Dolphin doesn’t look like much. It’s a compact car with a 620 kwH battery that takes 7 seconds to get from zero to 60.
But it sells in Australia for the equivalent of $25,500. Worse (for TSLA stock) is that it’s not alone. Geely (OTCMKTS:GELYF), which owns Polestar (NASDAQ:PSNY), will soon offer an even cheaper car called the Galaxy. So, too, will Nio (NYSE:NIO), as I’ve been writing nearly every week.
Cybertruck is a Homer
Cybertruck echoes a classic Simpsons episode from 1991, where Homer Simpson designs a car.
Just like the Homer, the Cybertruck is all straight lines and ego. (All it lacks is a giant cup holder.) It ignores all the industry’s important lessons about style, economy, and comfort. It’s one man’s fantasy.
Like Homer, CEO Elon Musk decided to see car design as an arms race. Cybertruck goes from 0-60 in 3.4 seconds. It can tow 11,000 pounds, and Tesla claims the battery can run 340 miles on a charge. Whether it meets these specs is irrelevant to me. The question should be, who needs these specs?
Cybertruck is designed to compete with the Ford Motor (NYSE:F) Lightning and the Rivian (NASDAQ:RIVN) R1T. Both sell for about $60,000. The average new car in the U.S. today lists for $48,000. That’s a problem, not an opportunity.
The Bottom Line on TSLA Stock
At his conference call last week, Musk did tease a $25,000 EV, called the Redwood, which would start production in the middle of 2025. Given Musk’s past performance, and the fact that most cars take three years to produce after they’re announced, I wouldn’t expect it until 2027.
The Redwood will require Tesla to build a new platform, while the Chinese cars are already built. Musk said that China will “pretty much demolish” most competitors unless the West imposes significant tariffs. In poker we call this a “tell.”
Even if Tesla can deliver on the Redwood, and on time, its gross margins will be nothing like the 20% plus of years past. It is those margins that have been keeping Tesla’s stock price high all these years.
You may argue that Tesla’s energy storage unit, which doubled in 2023, can save it. But it’s still less than 6% of total revenues.
I tried to say this gently last month but I’m just going to shout it now.
Sell Tesla.
As of this writing, Dana Blankenhorn did not hold (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.
