Tesla (TSLA -0.67%) has worked out to be a truly fantastic investment. In the last decade, shares have skyrocketed 1,700%. That gain trounces the total return of the Nasdaq Composite.
Most people would agree that Tesla has accomplished some great things on its path to becoming one of the most valuable businesses on the face of the planet. However, you shouldn't buy this top electric vehicle (EV) stock, even as it sits 36% off its peak price (as of July 9). Here's why.
Disrupting the auto sector
Tesla went from only selling the high-performance Roadster model to now offering five key models (S, X, 3, Y, and Cybertruck). And there is a new lower-cost model planned for production in 2025 that investors hope can help the company gain market share. According to Cox Automotive, Tesla has a 51% share of the U.S. market for EV unit sales. And according to Counterpoint Research, Tesla has a 20% share of the global market.
What's noteworthy is just how much Tesla has disrupted the auto sector. A decade ago, it was difficult to find any EVs on the road, something that the company helped to change with its focus on elegant car exterior designs with innovative tech features. The EV maker's monster success, as exemplified by its well-regarded brand and robust manufacturing capabilities, spurred legacy carmakers to start investing in their own EV ambitions.
Sales in the most recent quarter (ended March 31) came in at $21.3 billion, nearly fivefold higher than just five years ago in Q1 2019. Tesla also has exposure to the energy sector, offering storage and generation products. In 2023, the company raked in $6 billion in revenue from these operations, representing 6% of the total. With its cars and energy products, Tesla is attempting to usher in a sustainable future for the world.
Huge expectations
I mentioned earlier that Tesla shares are well off their all-time high. This is even after they have soared 48% in the past month. However, the stock is not a bargain, trading at a price-to-earnings ratio of 67.2.
That valuation is extremely expensive, especially when you consider that right now, Tesla is still just a car manufacturer. And to be clear, it's a struggling one at that. Its sales were up by just 3% in Q4 last year, before falling 9% in the first quarter of this year. Competition in the industry, as well as higher interest rates, don't create a favorable backdrop for strong growth. Moreover, Tesla has felt pressure on its margins, too.
But there are some bullish investors, like Cathie Wood of Ark Invest, that believe Tesla is more than an automaker. They expect the EV pioneer will one day launch full self-driving capabilities, a breakthrough whose deadline has been pushed back before. And when this happens, Tesla will be able to introduce a global fleet of robotaxis, which supposedly has a gargantuan total addressable market and can rake in high-margin revenue for the company.
In my opinion, Tesla's lofty valuation reflects the high expectations of what the business could look like one day, not the reality of what the situation actually is right now. And that's just difficult to put money behind, particularly when the probability of robotaxis might still be low. All this points to the fact that Tesla is a story stock at the end of the day, a label that can be attributed to its visionary founder and CEO, Elon Musk.
It's hard to deny what Tesla has accomplished, adopting an innovative and disruptive strategy to upend an industry and become an $823 billion enterprise. But right now, it's best to avoid this stock.
