There's no denying that Tesla (TSLA 4.96%) has been one of the most dynamic and influential companies over the past decade or so. I know many who absolutely love their Tesla vehicles, as well as investors who hold Tesla stock as a large percentage of their portfolios.
But if you own a lot of Tesla stock, now may be a good time to lighten up.
The danger here is due to CEO Elon Musk's takeover of Twitter, and yes, the reason has to do with his increasingly political commentary since taking over the platform. But the reason Tesla stock may be in danger doesn't have anything to do with Musk's political views in and of themselves. Rather, it's that his highly public, aggressive, and increasingly partisan views stand a good chance of alienating Tesla's core customer base.
Still trading at 50 times earnings even after this year's 52% decline, Tesla's stock still remains highly vulnerable. If you're a shareholder, it's time to face up to some very large risks that have emerged in recent weeks -- especially if Tesla is an outsize position in your portfolio.
Recent customer surveys show brewing trouble
Recently, U.K. consumer survey company YouGov released the results of its November Tesla survey, which found that more respondents now had a negative view of the brand than a positive one. The net reading was negative-1.4%, down from a positive-5.9% to start the year and a peak of 6.7% in May. According to The Wall Street Journal, this was the first time net favorability ratings had gone negative for Tesla since YouGov began conducting the poll in 2016.
The declining brand perception was also captured in a second survey conducted by U.S.-based survey company Morning Consult. MC's November survey showed Tesla's favorability had fallen from 43% at the start of 2022 to 38% by the end of November, while negative sentiment increased from 15% to 22% during that time.
Keep in mind, this was before last weekend's tweet-storm, in which Musk personally attacked Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, while also making controversial statements about transgender individuals.
Given Musk's increasingly vocal and partisan rhetoric, it shouldn't be surprising that Morning Consult's poll showed an emerging partisan divide among its respondents. Tesla's net favorability scores among Democrats fell to an average of 10.4% in November, sharply down from 24.8% in October. On the other hand, net favorability among Republicans increased from 20% to 26.5% during that time.
Why increased favorability among Republicans may not help
Tesla shareholders may look at these numbers and shrug. After all, if one political group begins liking Tesla more, wouldn't that just offset decreasing favorability among the other group?
It's not that simple, for two reasons. First, while we don't have a strict party breakdown of Tesla owners, we do know that nearly 40% of Tesla's U.S. sales last year were from California. Since about half of Tesla's sales come from the U.S., that means about 20% of current revenue is from California. California is, of course, one of the most heavily Democratic states in the nation, at 46.8% of registered voters, with only 23.9% registered as Republicans, and the rest independents. In the 2020 presidential election, Joe Biden won California over Donald Trump by a difference of 63.5% to 29.2%, with Biden garnering the highest percentage of the California vote in any presidential election going back to Franklin Delano Roosevelt.
It's a fair bet that a lot of Tesla's early adopter customers are Democrats. Not 100% by any means, as many Republicans also own Teslas. However, it's still an open question to whether Tesla's Democratic-leaning customers will continue to buy Teslas.
Could Republican buying pick up the slack? It's possible, but a long shot. Most Republican-leaning states have much lower gasoline prices than California, which has the highest gas prices in the nation, because of its requirement that refiners make a special blend of gasoline that reduces smog from internal combustion engines (ICE). Now that gas prices are broadly lower throughout the country, the economic advantage of buying a more expensive electric vehicle (EV) isn't as great in Republican-leaning states.
No margin of safety
If Tesla were trading at a low valuation akin to other automaker stocks, the potential alienation of half its U.S. customer base might not be a problem. However, Tesla doesn't trade in line with other car stocks. Rather, despite this year's 50%-plus decline, Tesla still trades at 50 times earnings. By contrast, just about every other mass-market auto stock trades at a single-digit P/E ratio.
In other words, Tesla shareholders can't afford to merely swap one customer contingent for another. It needs to continue adding customers as well as retain current customers to justify its current valuation. While Tesla's stock trades at a more reasonable 33 times 2023 earnings estimates, those earnings estimates could get revised downward if half of those expected customers balk at purchasing Teslas next year.
Meanwhile, while Tesla had the high-performance battery-only vehicle market for itself over the past few years as the first-mover, legacy automakers are now bringing better EV competitors to market, with many just hitting dealerships this year. Ford (F 0.69%) is just now rolling out its electric Mustang and F-150 Lightning models, while General Motors (GM 1.20%) just unveiled the electric GMC Sierra, Chevy Silverado, and the low-priced Chevy Equinox. These are just a few examples. Of note, the Equinox has a very low price point for an EV, starting at $30,000, while Tesla's cheapest vehicle starts at just under $47,000.
Even if Teslas remain superior from an engineering standpoint, these cost-effective alternatives are definitely closing the gap. If half of America's customers begin to find driving a Tesla untenable, there are now several "good-enough" competitors in 2023 that weren't there before, and more coming in the future.
And yet another risk looms
In addition to the aforementioned risks for Tesla, another remains: Elon Musk's still-large stake in Tesla, and the fact that he may need to sell more stock to help finance the Twitter endeavor.
Remember, Musk agreed to buy Twitter in April, when the market was still around 10% higher, and digital advertising stock valuations were much higher than today. Moreover, Musk used lots of debt to finance the purchase.
While Musk has cut lots of costs at Twitter, his handling of content moderation, and probably the content of some of his own tweets themselves, have caused some advertisers leave the platform, in what is already a difficult year for digital advertising revenue.
While Twitter is now private and we can't know the exact top-line impact, just yesterday, Reuters reported that the banks who lent Twitter money are currently marking down the value of Twitter's $10 billion secured loans by as much as 20%, with Twitter's $3 billion in unsecured loans marked down by even more. That points to a real risk of bankruptcy.
Meanwhile, on Tuesday, The New York Times cited people close to Twitter who claimed the company hasn't paid its office rent in weeks and is contemplating not paying severance to the thousands of employees Musk laid off upon taking over the company in October. These could be signs of further financial stress at Twitter.
Regardless of how Musk is running Twitter, the important part for Tesla shareholders is that Musk may have to sell more of his Tesla stock to pay off Twitter's creditors, or potentially lose control of the company. While that scenario might not come to pass, the Reuters and New York Times pieces indicate it's certainly a possibility and is yet another risk looming over the stock.
Great cars, risky stock
Make no mistake: Tesla is an awesome company that has pulled off a seemingly impossible feat of creating the first new American car company in decades -- while basically singlehandedly pulling the rest of the auto industry into the EV age.
That's why Tesla is such a favorite among investors and vehicle/climate change advocates, and for good reason. However, if you're a Tesla shareholder, Musk's takeover of Twitter is presenting some very large risks that weren't present before.
Of course, I could be wrong, and Tesla's business could very well prove resilient against these macroeconomic headwinds and political overhang. Moreover, Tesla remains a great technology company, so there may be more innovations down the road beyond its EVs, perhaps in solar or battery deployment. However, those parts of the business are relatively small compared with Tesla's auto sales, and the risks to the auto business are real. Furthermore, if you wait for evidence of slowing or declining sales, the stock may be much lower by that time.
Therefore, should you have a large allocation to Tesla in your stock portfolio, it may be a good idea to think about trimming and diversifying or, if you can't live with these risks, getting out of the stock entirely.
After all, there are lots of exciting technology companies that have sold off a lot in 2022's market turmoil. While it may be painful to sell shares of a stock in a company you love, especially down 50%, on the bright side, there are also a lot of viable alternatives for your investment dollars in the tech sector these days.
