A Reality Check for Tesla Investors
The stock market has been dominated by the so-called “Magnificent Seven” in recent years, with these tech giants attracting significant capital and attention from investors. One of these stocks, Tesla (NASDAQ: TSLA), has produced phenomenal returns for its shareholders, soaring 1,170% over the past five years. However, I predict that this trend will not continue throughout the rest of this decade.
Tesla’s Challenges as an Auto Manufacturer
Despite its efforts to present itself as more than just a car company, Tesla is still heavily reliant on the sale of electric vehicles (EVs). In Q2, 78% of its revenue came from EV sales. While growth was strong in the past, driven by demand for its EV lineup and improving profitability, Tesla’s differentiation is diminishing. The company is facing challenges common to all auto manufacturers, including higher rates that make buying new cars less affordable and competitive pressures that have forced it to cut prices.
A Long and Uncertain Road Ahead
Tesla’s valuation is steep, with a price-to-earnings ratio of 61.9, even after shares have fallen 46% from their November 2021 peak. This prices in a lot of optimism about the future, particularly regarding the company’s autonomous driving goals. However, I believe that Tesla is still a long way from introducing full self-driving capabilities, if at all. The recent disappointment of its “We, Robot” event, which saw the stock fall 8% between Oct. 10 and Oct. 17, highlights the uncertainty surrounding Tesla’s progress.
Overvalued and Unlikely to Beat the Market
Given its challenges as an auto manufacturer and the uncertainty surrounding its autonomous goals, I believe that Tesla is unlikely to beat the S&P 500 between now and 2030. In fact, I would choose to own an S&P 500 exchange-traded fund over Tesla shares for the remainder of the decade. With its valuation already pricing in a favorable outcome, I see little room for upside and significant potential for disappointment.
A More Realistic View of Tesla’s Prospects
Investors should take a more realistic view of Tesla’s prospects, recognizing that the company is still an auto manufacturer at heart. While there may be value in its autonomous driving and artificial intelligence endeavors, these are still in the early stages of development, and significant work needs to be done to effectively monetize them. By viewing Tesla as it currently is, rather than relying on optimistic assumptions about its future, investors can make more informed decisions about their investments.
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