Tesla (NASDAQ:TSLA) has been stuck in a relatively tight trading range in recent months, mostly hovering around the high $500’s or mid $600’s range. Let’s review why TSLA stock may be one of the worse investments in the world at this time – and not regain its recent highs for quite some time.
One of the factors is the company’s China problem.
Tesla delivered 21,936 cars to Chinese customers in May, according to the China Passenger Car Association. This was almost twice the number sold the month before, but still well below the near 36,000 it shipped in March 2021.
Market share dropped to 8% in April as General Motors (NYSE:GM) remains the leader with its low cost Wuling HongGuang Mini.
TSLA Stock and EV Growth in China
China has become the biggest electric car market in the world as it has experienced aggressive growth in new electric vehicle startups. Market share is hard to gain as there are now more than 100 competitors. Some of these larger competitors are profitable, which offers a leg up on Tesla, which has a long history operating losses (ex-regulatory credits).
In addition, several months ago, China issues a recall of more than 200,000 Tesla cars citing alleged safety concerns in Models 3 and Y that were made in Shanghai.
Tesla vehicles were also banned at some Chinese government facilities because of allegations that the cars could send data to the U.S.
Lastly, the macro China issues with the U.S. can’t be ignored. Worsening relations between the two superpowers may have a negative effect of all American companies operating there. Some are even predicting a tech cold war with China.
The unpredictability of Chinese regulators, as well as influence of the Chinese Communist Party on all foreign business. make long-term growth rate projections almost impossible for Tesla.
If Tesla cannot sell a substantially large amount of cars in China in coming years, TSLA stock won’t be trading where it is today.
Cybertruck Failure Is Likely
Expansion into other types of vehicles such as trucks and SUVs is a key part of Tesla’s growth story, particularly if they expect to grow revenues to fit into their current outrageous market cap. Tesla’s Cybertruck, revealed in November 2019, shocked the auto and technology world with its stark and unconventional look and body style. Not to mention its notorious failed window glass test.
With its unique style and high price point, the Cybertruck will likely be a niche product for Tesla superfans or people with incredible amounts of money to waste. A mass market high production truck type vehicle is highly unlikely.
More importantly, the electric vehicle competition in this space will be intense going forward. More conventional EV trucks from Ford, Hummer, Dodge and start-up Rivian will likely be the market share leaders.
There are more than 1 million reservations for the Cybertruck at this point. But reservations are a long march away from actual sales and deliveries.
Self-Driving Problems
Full stand-alone self-driving (FSD) vehicles on some mass scale won’t happen for a long-time. Perhaps not even in our generation. Tesla has been using customers as beta testers for FSD with often negative consequences. Even Tesla supporters are becoming critical.
Elon Musk recently wrote:
“Generalized self-driving is a hard problem, as it requires solving a large part of real-world AI. I didn’t expect it to be so hard, but the difficulty is obvious in retrospect. Nothing has more degrees of freedom than reality,”
The National Highway Traffic Safety Administration has its own opinions on its website. It states full self-driving vehicles will come to fruition (or be allowed by the NHTSA) in 2025.
In June, the NSTSA said that it will require companies such as Tesla and Waymo to report accidents involving driver-assist and automated systems within one day of the crash, or within one day of learning of the crash. This is a major change that shows a tougher stance by regulators.
This issue won’t go away, particularly for customers that have been paying for something that doesn’t exist.
ARK’s Model for TSLA Stock
As pointed out in my article regarding Ark Investment Management, Tesla has many supporters, some of which may qualify as a pump-and-dump scheme.
In March 2021, Cathie Wood’s ARK Investment Management predicted that Tesla will hit $3,000 per share, or a $3 trillion market cap by 2025. ARK’s financial model for TSLA stock was debunked by many analysts as a pie-in-the-sky number. (Some solid analysis can be found here, here and here.)
The market cap on that price target is greater than Apple (NASDAQ:AAPL) and Microsoft’s (NASDAQ:MSFT) combined market caps. But those companies’ operating profits are twice as big as Tesla’s expected total revenues. How does a company achieve those goals in an enormously capital-intensive business without raising capital?
Despite its mythical status as a world savior, Tesla needs massive infrastructure to build such large and heavy items, particularly the 10 million cars needed to justify a $3,000 price target. Tesla has raised close to $30 billion in recent years to fund property, plant and equipment. That’s still many billions shy of Toyota’s cumulative $216 billion (11 million cars) and Volkswagen’s $144 billion (10 million cars).
Pure financials also provide a sobering picture. Using a discounted cash flow calculation, a $3,000 price target implies annual EBITDA growth of approximately 75% over the next decade. That’s a feat even Tesla only achieved in three years since 2009 when it was much smaller. It can’t repeat due to the law of large numbers.
TSLA stock recently made up 10% of ARKK, which makes this outrageous Tesla $3,000 price target look similar to a pump and dump scheme. In fact, it’s reminiscent of The Radio Pool incident in the 1920’s. This is one of the key reasons the Security and Exchange Commission (SEC) was created.
Valuation
The electric vehicle firm, which sold nearly 500,000 cars in 2020, recently had a market capitalization of $615 billion. That’s well over two times larger than Toyota’s (NYSE:TM) $250 billion. Toyota, if you didn’t know, is a firm that sells more than 11 million cars.
Let’s put aside the fact that Tesla’s market cap was greater than the entire auto industry for now. The current valuation for TSLA stock also ignores competition, particularly in China where Tesla has high hopes but has to compete against BYD (OTCMKTS:BYDDF), the market leader.
Oh, and you can add Volkswagen (OTCMKTS:VWAGY), BMW (OTCMKTS:BMWYY) and many others to that list. And remember, at some point Tesla (and all EV manufacturers) will run up against the threat of the green myth where potential buyers increasingly scrutinize the environmental benefits of these cars.
And where has the SEC been with regard to the insider acquisition of SolarCity in 2016 as well as the CEO of such a large publicly traded company violating federal laws in a public forum? The free pass given to Musk by the media and federal regulators will go down in the history books at some point as a failure of government and society.
Bottom Line
Obviously, TSLA stock is in a bubble.
Although that’s somewhat of a meaningless statement because nobody can predict when the bubble pops. But is it worth that possible extra 10% or 15% upside when the downside could be well over 50%? Of course not.
Look for an entry point in the $200 range.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.