In line with my previous predictions, Tesla’s (NASDAQ:TSLA) fourth-quarter results show that the automaker’s revenue growth has slowed to a trickle, while its cash generation is sinking. Moreover, the company indicated that its situation is likely to get worse before it gets better. Given these points, along with the very high valuation of TSLA stock, I continue to believe that investors should sell the shares.
On the other hand, since I’m not a believer in the demise of the EV Revolution, I do see light at the end of the tunnel for Tesla. But in my opinion, the automaker’s shares will only rise above their current levels if it manages to deliver on CEO Elon Musk’s vision much more than it has in the past.
Strong Competition Is Greatly Undermining Tesla
Tesla’s automotive revenue rose only 1% last quarter versus the same period a year earlier, and its EBITDA, excluding certain items, tumbled 27% year-over-year.
Competition is taking a big toll on Tesla, as many automakers’ EV businesses are growing much more rapidly than Elon Musk’s company, forcing TSLA to cut prices and cede market share.
For evidence of the latter points, consider that the number of Tesla vehicles registered in the U.S. last November climbed 8.6% versus the same period a year earlier, according to S&P. Conversely, the new registrations of EVs made by Ford (NYSE:F), BMW (OTC:BMWYY), Mercedes (OTC:MBGYY) and Rivian (NASDAQ:RIVN) jumped 21%, 42%, 160% and 146% year-over-year, respectively.
A Lack of Effective Innovation Is Also Hurting Tesla
I believe that a lack of effective innovation is causing Tesla’s market share to decline. In the last six years, the automaker has only released two new EVs: the Tesla Semi truck and its Cybertruck. I’ve heard little or nothing about the Semi since it was unveiled almost a year ago and the company barely mentioned it on its earnings conference call held on Jan. 25, so I’m guessing that it’s not making a big splash.
As for the Cybertruck, its specs came in well below what Musk had promised, So unsurprisingly, the demand for it does not seem to be overwhelming. Indeed, the company said on its earnings call that it had not yet obtained orders for all of the Cybertrucks that it plans to produce in 2024.
Meanwhile, although I’m not an expert on Advanced Driver Assistance Systems, it appears to me that at least two automakers Mercedes and China’s Xpeng (NASDAQ:XPEV) provide at least similar overall ADAS capabilities as Tesla’s Full Self-Driving offering. Mercedes has gotten up to Level 3 of autonomy, while Tesla is at Level 2. And Xpeng’s EVs can perform most functions autonomously as well, while its ADAS is improving every month.
The Light at the End of the Tunnel
Although I don’t believe that the demand for the Cybertruck is huge, I do believe that the EV will wind up significantly boosting Tesla’s financial results. That’s because the chip maker says that the orders for the truck were on track to exceed its likely production of the vehicle this year.
Moreover, Musk stated that the firm plans to introduce a relatively low-cost EV in 2025. In light of the relative shortage of low-cost EVs in the U.S. market, I believe that this EV will be very popular in America. Consequently, I believe that, if the EV’s gross margins are positive, it will greatly boost the automaker’s top and bottom lines over the long term
However, the valuation of TSLA stock remains very high for an automaker. Specifically, its forward price/earnings ratio is 55.5, while the P/E ratios of most of its peers are in single digits.
Consequently, I believe that, in order for TSLA stock to ever rise meaningfully above its current levels, the automaker will have to realize Musk’s vision in autonomous driving, robotaxis, the commercial launch of its Optimus robot, and/or selling its Dojo supercomputer which “specializes in AI.”
On the date of publication, Larry Ramer held long positions in XPEV and RIVN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
