Once seen as a high-risk and high-reward bet, Tesla (NASDAQ:TSLA) has turned into an absolute behemoth in the stock market. Valued as a large chunk of the North American auto sector, this is a company that’s proven electric vehicles can become popular and take share away from the incumbents. This will have important implications for TSLA stock holders.
Investors who have held Tesla over the long term have certainly done well. Much of this has had to do with Elon Musk’s promises, many of which came to fruition later than expected, but many of which ultimately shifted the auto landscape for good. For this, he can certainly be regarded as one of the pioneers of change in an industry that may have grown dull.
However, single-man risks tied to Musk and his various ventures (I won’t even touch his X deal) make this stock a difficult one to assess. The company’s valuation is based on the future vision of a man who wants to seemingly do everything all at once. For those looking for high-quality electric vehicles, competition in the affordable luxury EV space is heating up, providing consumers with options that didn’t exist before. And despite price cuts, demand appears to be waning across this sector, in part due to higher interest rates.
That’s a lot for investors to digest, so let’s dive into the two biggest headwinds I see for Tesla moving forward.
#1: Competition Now Matters
In the first two weeks of 2024, the Austin-based EV maker suffered a $94 billion market value drop. Hertz’s shift away from electric vehicles, continued price cuts (particularly in the Chinese market), and rising labor costs have been a thorn in the side of this stock trying to race to new highs. There’s a race to the bottom building in this sector, and Tesla appears to be leading the way. That’s not great for demand in the short-term.
Over the longer-term, I think competition-related issues are going to be more important to consider. I think current price cuts are a direct result of heightened competition in this space. Every auto company is racing to release new models of every type of vehicle (and I’m sorry, but the cybertruck just isn’t going to make a dent in the market, for obvious reasons – just look at it). Over time, margins will compress, and the early-mover advantage Tesla had will be gone, along with its once-stellar margins.
Perhaps that’s an overly bearish take. Tesla’s market share numbers are still impressive. But if unionization efforts pick up at Tesla’s plants, consumers shift their preferences to European-made vehicles, or Ford (NYSE:F) or General Motors (NYSE:GM) pick up their game substantially, I think Tesla could be in for some serious trouble.
#2: Elon Musk is Losing the Confidence of His Base
Elon Musk’s personality is hard to describe. Perhaps the funniest take I’ve heard from a friend as to why he didn’t buy a Tesla EV was “because I don’t want to be the guy who’s driving around in a giant red MAGA hat.” Had to laugh at that one, but I do think that the hot takes many high-profile CEOs have on various topics do matter to a consumer base. For Tesla’s stereotypical average buyer – a tech worker in California (just look at its California sales numbers), Musk’s antics may just be enough to hurt his sales (as has seemed to be the case for his advertising revenue at X, formerly Twitter).
In addition, Musk faces independent challenges as Tesla grapples with a $56 billion compensation lawsuit. Musk’s potential shift from his core competency to AI and other businesses has raised fiduciary concerns, particularly with his involvement in x.AI. The board might mitigate this with a buyback alongside a deal, but Tesla’s cash needs complicate matters.
I’m of the view that eventually these headlines will catch up to Musk and his investors. I just don’t want to be holding the bag when this company is priced for what it really is (a low-margin car company). No, it’s not a software or robotics or solar or autonomous driving company. It just isn’t.
My Take: Simply Avoid TSLA Stock
Tesla isn’t the only EV available in the U.S. market anymore. Tesla isn’t the largest EV maker in the world anymore – that title belongs to China’s BYD Co. (OTCMKTS:BYDDF). And Elon Musk isn’t America’s most revered and worshipped genius CEO anymore.
As Tesla’s fundamentals reflect the negative impact of lower margins, more competition, and single-man risk in the form of Elon Musk remaining the CEO, I think this stock will most certainly be trading lower five years from now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.