Last year, retail investors made their presence known to Wall Street like never before. Online trading platforms like Robinhood (HOOD 2.58%), which have been especially popular among the retail crowd, rolled out the red carpet for everyday investors to put their money to work on Wall Street. When that happened, retail rocked the boat and sent a number of heavily short-sold stocks rocketing higher.

Robinhood offers commission-free trading on the major U.S. exchanges, allows its customers to make fractional-share purchases, and gifts free shares of stock (at random) to new members.

A person holding a smartphone that's displaying a volatile stock chart with buy and sell buttons above it.

Image source: Getty Images.

Apple has been Robinhood investors' top holding for quite some time

Although Robinhood's retail faithful have demonstrated that they love chasing momentum plays, penny stocks, and heavily short-sold companies, there has been one consistency: tech kingpin Apple (AAPL -1.04%) has regularly been the most held stock on the platform.

There is no shortage of reasons why investors love Apple. For starters, it's easily one of the most-recognized brands in the world. In fact, a report from Brand Finance has pegged Apple as the most valuable brand in the world in back-to-back years. The report cited Apple's diversification on the product front, its subscription-driven push, and the "bolstering of its privacy and environmental credentials," as reasons for it taking the top spot, once again. 

Apple's innovation has also been a key driver of its share-price outperformance. For instance, Apple's introduction of a 5G-capable iPhone during the fourth quarter of 2020 sent its share of the U.S. smartphone market soaring. Since the release of 5G iPhones, Apple's domestic smartphone share has dipped below 50% during only one quarter. 

But this innovation can be seen beyond just the company's successful product line. CEO Tim Cook is overseeing the ongoing transition of Apple into a services-oriented business. By promoting subscription services, Apple has an opportunity to further boost its already impressive brand loyalty, as well as increase its long-term operating margins. Perhaps most importantly, as subscription sales grow into a larger percentage of net revenue, the sales vacillations often witnessed with product replacement cycles should lessen.

Even Apple's capital return program gives investors more than enough reason to buy. Since initiating a share buyback program in 2013, Apple has bought back in the neighborhood of $520 billion worth of its common stock.  To boot, it parses out more than $14 billion a year in annual dividends to its shareholders.

Move over, Apple! There's a new No. 1 in town

However, change is a foundational part of Wall Street; and there's been a big change atop Robinhood's leaderboard (the list of the 100 most held stocks on the platform). As of the beginning of August 2022, electric-vehicle (EV) manufacturer Tesla (TSLA 0.79%) had dethroned Apple as the most held stock on Robinhood.

Before digging into the fundamental aspects behind retail investors' love of Tesla, I'd be remiss if I didn't point out that its shares have rocketed higher by more than 1,800% in the trailing three-year period and over 17,100% for the trailing decade. Robinhood investors love momentum stocks, and Tesla has certainly demonstrated it fits the definition.

Another reason for investors to be excited about Tesla is the company's success in building itself from the ground up. While other auto companies have tried a ground-up approach, Tesla was the first in more than five decades to reach and sustain mass production. Even with semiconductor chip shortages and parts challenges tied to the COVID-19 pandemic, Tesla looks to be on pace to crack the 1-million-vehicle production mark in 2022

Tesla has also, decisively, pushed into the profit column. In each of the past five quarters, Tesla has generated between $1.14 billion and $3.32 billion in generally accepted accounting principles (GAAP) profit.  This appears to have further allayed fears about the company's long-term viability.

And let's face it: retail investors are big fans of CEO Elon Musk. The outspoken CEO has promised a number of innovative technologies are on the way, including more-encompassing full self-driving, as well as Tesla Bot, a robotic humanoid currently under development by the company. Musk also own tokens of popular cryptocurrency Dogecoin and has begun accepting DOGE coins for a small handful of Tesla merchandise.

A Tesla Model S plugged into a wall outlet for charging.

A Tesla Model S charging. Image source: Tesla.

Robinhood investors could be headed for a breakdown

When examined with a wide lens, there's plenty of basis for investors to be excited about the EV industry and its long runway of growth. But when that lens is focused solely on Tesla and its $942 billion market cap, a number of red flags emerge.

To start with, Tesla's valuation has exploded higher on the premise that its competitive advantages are sustainable. Although it does have a sizable head start when it comes to battery capacity, range, and power, we're already witnessing a number of new and legacy automakers catching up on range.

For example, Nio's recently introduced sedans, the ET7 and ET5, have battery upgrades buyers can purchase that increase their range to 621 miles, according to the company. That's far and away better than Tesla's affordable Model 3 and premium Model S. In other words, the deep pockets of legacy auto companies and the innovative capacity of new auto companies like Nio could quickly chip away at Tesla's "competitive edge."

Whereas Elon Musk is a big reason why retail investors have bought into Tesla, he could just as easily be the primary reason for investors to avoid it like the plague. That's because Musk has a habit of overpromising and underdelivering on projects. Remember the conceptual all-electric Tesla Semi that was unveiled in late 2017? The first production model isn't expected until 2023.  Recall when Elon Musk promised to have 1 million robotaxis without a steering wheel or pedals on the roads by the end of 2020? That promise has been pushed back to 2024.  This isn't to say that Musk doesn't eventually deliver what he set out to achieve. Rather, it demonstrates that Tesla's CEO is rarely ever able to make good on his promises in a timely manner.

Tesla's income statements are yet another cause to pause. Although automotive gross margin had improved until the latest quarter, Tesla has still relied on selling regulatory credits to other automakers to boost its profits. With semiconductor chip shortages persisting, inflation soaring, and China's provincial COVID-19 lockdowns adversely impacting the Shanghai gigafactory, it's not clear how Tesla will buoy its automotive gross margin going forward.

In an industry where single-digit forward-year price-to-earnings (P/E) ratios are the norm, Tesla stands out like a sore thumb with a forward P/E ratio of 57.