Tesla (NASDAQ:TSLA) stock gets more and more complex by the year, as does the rest of the electric vehicle market.
Despite its remarkable growth, investors have much to anticipate in the coming years. In 2022, EVs represented under 10% of total U.S. car sales, leaving substantial growth potential, with 48% of Q1 2023 revenue from the U.S. strong domestic market share positions TSLA advantageously.
Yet, many negative triggers for TSLA stock keep piling up. Those holding the stock for years have enjoyed substantial gains. However, concerns about Tesla’s size and viability are increasingly discussed among investors.
Sky Rocketing Valuations Can Be Risky
While Tesla exhibits strengths like market leadership and sales growth, the valuation is crucial for potential returns. With a P/E ratio of 77, lower but still expensive, considering its growth potential and competition is essential.
As Tesla’s growth slows due to market limitations and rivals, its high P/E compared to Ford and GM raises questions.
Tesla’s growth narrative is well-known, as it aims to revolutionize the shift to sustainable energy. Valuation is crucial for investors, determining future returns based on entry price. Current automaker valuations seem disproportionate.
With Ford and General Motors valued at $48.7 billion and $46.8 billion, respectively, Tesla’s staggering $756.24 billion valuation is surprising.
Despite Tesla’s push for software-based revenue and evolving car purchase models, its valuation multiple raises questions even among bullish investors. The extremely high valuation warrants careful scrutiny before considering an investment in TSLA stock.
Tesla Is Not Inflation-Proof
Tesla investors should be wary of various negative triggers. Rising bond yields due to inflation affect all growth stocks, including EV stocks. The ongoing global chip shortage impacts EV production, including Tesla’s.
Earnings quality concerns arise from the company’s reliance on unsustainable revenue streams like Bitcoin trading and emissions credit sales to mask EV-related losses.
Tesla faces challenges beyond inflation. Potential reductions in EV tax credits mandated by governments could harm sales. This marks the company’s fifth price reduction this year, part of a global discount strategy.
While discounts were offered in various countries to boost demand, first-quarter deliveries only rose by 4%. Lowering prices may attract more buyers amid the shift towards greater EV adoption.
Tesla Sales in China Are Weak
Tesla’s sales decline in China indicates its aggressive price cuts are losing effectiveness, noted Bank of America. Model 3 and Model Y deliveries in China fell 31% in July, while Chinese rival BYD Auto grew 4% month-over-month.
The initial demand surge following price reductions may be short-lived, suggesting the need for a longer-term strategy.
Tesla’s strategy of lowering vehicle prices to gain an edge and increase market share seemed effective initially, especially against competitors like BYD.
A Wedbush survey indicated that many consumers in China were influenced by Tesla’s price cuts. However, the situation has shifted, with BYD now benefiting from the changing dynamics.
Tesla’s deliveries in July dropped 31% month-over-month, falling below the year-to-date average and aligning with early 2022 figures.
In contrast, BYD, Tesla’s key EV competitor in China, maintained positive monthly growth for six consecutive months. This suggests that the dip in Tesla’s demand isn’t due to broader economic conditions in China.
It has now raised concerns about Tesla’s performance in the Chinese market.
What Now
Tesla’s high market cap compared to rivals might eventually reverse due to inflated valuations, suggesting a potential bubble. Skeptics highlight this perspective.
Optimists emphasize Tesla’s innovative disruption across various sectors, beyond cars, suggesting further growth. Evaluating both viewpoints and numbers is crucial for investors analyzing Tesla’s prospects.
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.