Selling your winners early is a common mistake for investors. Over the last two decades, plenty of people have owned stocks like Amazon and Netflix for short time periods, but few have had the discipline to hold on for 10-plus years and experience life-changing returns. However, sometimes it is necessary to sell positions when either the valuation gets way out of hand or the underlying business deteriorates.
If you own Tesla (TSLA -1.11%), Skillz (SKLZ -2.09%), or Lucid Group (LCID 0.41%) stock, now might be the time to rethink your position in these three growth stocks. Here's why.
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1. Tesla
Tesla is the leading electric vehicle (EV) manufacturer globally. It posted strong results in 2021, with revenue growing 71% year over year to $53.8 billion and net income growing 665% year over year to $5.5 billion. Just looking at these numbers might make you think Tesla stock is a must-buy. But there is a lot more to the story.
For one, Tesla stock has a market cap of approximately $850 billion, giving it a price-to-earnings ratio (P/E) of 154. This is much higher than a typical automotive business. For example, Toyota, the largest car company in the world by revenue, trades at a P/E of 8.
Why do car companies get such low earnings multiples? Because manufacturing is a capital-intensive business that makes it difficult for a company to generate excess cash for shareholders, which is what drives stock price returns over the long haul. Even if Tesla grows its net income at 10 times current levels over the next decade, the stock will still have a higher P/E than Toyota at its current market cap.
And let's not forget how many commodities form the input costs for EV manufacturers like Tesla. To make an EV, you need copper, nickel, cobalt, lithium, aluminum, and other raw materials. Prices for these commodities are currently soaring, which will make it very difficult for Tesla to maintain its current profit margins.
Tesla is one of the top-performing stocks of the last decade, making many long-term investors immensely wealthy in the process. But that has no bearing on where the stock is headed over the next 10 years.
2. Skillz
Skillz is a mobile game platform that wants to build competitive and social gaming experiences. The company has different games like Solitaire Cube, Pool Payday, and Dominoes Gold and users compete using real money to enter tournaments and competitions.
There are a few big problems with Skillz's business. For one, the social and esports side of gaming already has plenty of popular, well-capitalized competitors. These include franchises like FIFA Soccer and Madden NFL in sports and Fortnite within the shooter genre. The company's motto is to bring "fun and fair competition to players worldwide."
Frankly, that is what these established franchises are already doing. Even worse, Skillz competes in the casual mobile games category, which is hypercompetitive with thousands of free games for players to download across the different app stores.
These two problems (undifferentiated games and a hypercompetitive industry) are causing Skillz to spend unsustainable amounts of money on sales and marketing. In 2021, sales and marketing expenses hit $465 million, which is actually higher than the $384 million in total revenue the company generated last year. This is not a recipe for creating value for shareholders.
Skillz's stock price is down 92% in the past year, which might make you think it is time to "buy the dip." But with such a flawed business model and with no path to profitability, there may not be any price where it is smart to buy Skillz stock.
3. Lucid Group
Lucid Group competes with Tesla in the EV industry, with a focus on serving the luxury vehicle market. Its flagship vehicle, the Lucid Air, will cost you between $100,000 to $200,000 to buy, depending on included features.
Here's the deal though: Lucid has only just started production of its vehicles. In the fourth quarter of 2021, the company delivered 125 vehicles. Compare that to Tesla, which delivered 936,000 vehicles in 2021, and you can see that Lucid has a long way to go before it reaches any sort of scale, which is needed to generate profits in the automotive industry.
For example, in 2021 Lucid only generated $27 million in revenue and had over $1.5 billion in operating expenses. Management expects production and deliveries to surge in 2022, which will help manage these expenses, but the company will need to get much larger in order to start generating cash for shareholders. And don't forget the surging prices of commodities that are inputs for EVs, which will be a major headwind for Lucid Group over the next few quarters, just as it will be for Tesla.
Lucid stock has a market cap of $38 billion, which is actually higher than Ferrari, the premier luxury carmaker worldwide. And don't forget about other competitors like BMW and Mercedes, which are investing in luxury electric vehicles to compete with Lucid. This indicates to me that even if Lucid wins the luxury EV market, investors will have a tough time over the next decade. For that reason alone, it might be time to rethink your position in Lucid Group stock.
