Tesla (LSE:TSLA) shares are Cathie Wood’s favourite. The electric vehicle (EV) giant accounts for nearly 10% of the ARKK ETF portfolio.
Wood is one of the best-known investors worldwide. In 2020, she was named best stock-picker of the year by Bloomberg News editor-in-chief emeritus Matthew A Winkler when her portfolios surged during the pandemic.
So should I follow Wood into Tesla?
Pushing out the competition
Tesla has a privileged position as market leader and it’s one of the only EV companies to be making a profit. More recently, it’s been well publicised that the S&P 500 company is using its historically strong margins as a weapon to carve out more market share.
The share price plummeted this week after several shocks. Firstly, Tesla announced more price cuts, sending its share price, and those of its competitors, down.
Then on Wednesday, Elon Musk told investors that 2023 first-quarter revenue had come in at $2.5bn, down from the $3.7bn it made in the last quarter of last year. That’s a big fall. The first-quarter revenue for this year is also lower than the $3.3bn it made in the first quarter of 2022.
Musk also suggested there would be more pricing cutting to come. Tesla sells more electric cars in the lucrative US market than all its competitors combined, but it’s facing increasing competition.
However, it’s not just the US where Musk wants more market share. In China, where there are several impressive newcomers, Tesla’s sales in the first two months of 2023 accounted for 7.9% of new energy cars, including pure electric and plug-in hybrids. That’s up from 6.8% in the same period a year ago.
Will it work?
“We’re taking a view that pushing for higher volumes and a larger fleet is the right choice here… versus a lower volume and a higher margin,” Musk told investors this week.
That may concern investors as Tesla’s operating margin was just 11.4% in the first quarter, down from 16% the previous period, and 19.2% a year ago.
But vehicle production is increasing significantly. The company is looking to achieve compound average growth of 50% over multiple years. This year it’s on track to make at least 1.8m vehicles.
It’s worth noting that stock levels have grown to levels last seen in early 2020.
So will it work? Probably, but it’s still a big gamble.
Tesla had a reputation with investors for strong margins and with customers for an attractive, relatively premium EV product. Pricing is a signal of premium quality to customers, and that reputation could be eroded with continuous price cuts.
Plus, if I was in the market for a Tesla, I wouldn’t buy one now as Musk has suggested there might be more cuts to come.
Despite this, it’s clearly a strong company with margins that remain the envy on its competitors. It trades around 50 times earnings, which is expensive, but I can see that falling if margins get back on track in the medium term.
I definitely don’t love Tesla stock like Wood, but with the share price falling towards $160, it could be a good entry point. It’s an investment I’m considering.
