After looking at the data, you'll quickly see Tesla (TSLA -1.54%) has been one of the best businesses to have owned in recent times. In the past decade, shares have skyrocketed 1,190% higher, crushing the broader Nasdaq Composite Index by an insanely wide margin.
Elon Musk, the company's founder and CEO, deserves a ton of credit for disrupting the massive global car industry, resulting in strong growth for Tesla. This monster success has made this business one of the most valuable in the world.
There are reasons to believe that Tesla is great. But investors shouldn't buy the EV stock. Here's why.
Pushing the world forward
Tesla's rise over the years to become one of the most innovative companies on the planet has been remarkable to watch. Ten years ago in Q1 2014, the business only sold one model, the S, delivering just under 6,500 units that quarter. Musk led Tesla's design and manufacturing efforts to create an enterprise that now sells five models (in addition to the S, there's the X, 3, Y, and Cybertruck), with more possibly on the horizon.
Tesla pushed the industry forward to focus more on sustainability. The company's success literally changed the industry, forcing other automakers, from traditional manufacturers to start-ups, to invest heavily in their own EV efforts.
But Tesla is still dominating. It sold 1.8 million cars and generated $97 billion of revenue in 2023, astronomically higher than the totals a decade before. Tesla commanded 20% of the worldwide market for EVs last year. And one can't deny just how powerful the brand has become.
Those bold and lucky investors who had the foresight to buy shares a long time ago have certainly produced outstanding returns.
NASDAQ: TSLA
Key Data Points
Why you should pump the brakes
What Tesla has accomplished deserves a round of applause. However, if we view the business with a more critical eye today, we'll realize that it's a stock that prospective investors are better off keeping on the watch list, for two primary reasons.
The first reason to avoid buying Tesla is because of how much the business is struggling right now. The macroeconomic environment, with its high interest rates, inflationary pressures, and uncertainty about the near term, is negatively impacting the company.
After reporting 3% sales growth in Q4 last year, Tesla posted a troubling 9% decline in the first three months of 2024. From a consumer's perspective, higher borrowing costs make buying new cars much less affordable. Plus, Tesla has to deal with stiff competition these days, with well-funded Chinese EV makers making things difficult.
Profits are also taking a hit. Tesla does deserve lots of credit for achieving consistent positive earnings. But its margins have compressed due to a slowdown in revenue growth and ongoing vehicle price cuts. It's hard to know when this situation will start to improve. There's a chance that this is the new normal.
Another reason to avoid buying Tesla is because of the valuation. Even though shares are currently 56% off their all-time high, they still trade at a steep price-to-earnings ratio of 46.2. This tells me that the market still values Tesla more like a tech enterprise and less like a traditional car company. But based on the financial challenges I just described, that appears to be the wrong way to view this business.
The valuation demonstrates the lofty expectations investors have. Perhaps they are certain that Elon Musk and Tesla will one day be able to launch a global fleet of robotaxis, or that the business will become an energy generation and storage powerhouse, or that it will come to be a leader in the AI race. This could happen, but investors shouldn't pay such a high premium for a very uncertain outcome.
