The ingredients for a stock market disaster are a high share price, a company set for disappointing news, and a falling market. So, let’s talk about Tesla (NASDAQ:TSLA).
The stock’s down 25% since the start of the year. But investors thinking about piling into a discounted stock should be very careful.
High expectations
There’s no question Tesla shares come with high expectations. Earnings per share have fallen almost 41% since 2022, but the share price is up 50% over the last two years. That suggests investors are optimistic that the issues that have been weighing on profits recently are going to be temporary. And they may well be right about that.
The stock currently trades at a price-to-earnings (P/E) ratio of 141. But if its earnings can get back to where they were in 2022, this will fall to 71 without the share price going anywhere. That’s still a lot, but the point is investors seem to think Tesla has a relatively straightforward route to at least doubling its profits in the near future, which reflects a degree of optimism.
Disappointment potential
By themselves, high expectations aren’t a problem. But in terms of car manufacturing, Tesla’s recent results indicate its competitive position might be under threat. The latest news from Europe indicates that delivery numbers aren’t encouraging. Tesla’s sales have been going backwards while electric vehicles (EVs) generally have been on the up.
That means the company is losing market share to its rivals. And the latest news from BYD is that it has a meaningful advantage when it comes to charging speeds.
All of this points to the potential for disappointment when Tesla reports its Q1 earnings later this month. But the imminent issues with the stock don’t stop there.
A falling stock market
The last cause for concern is the US stock market’s recent decline. For several reasons, some of which are linked to import tariffs, investors are concerned about inflation.
As a result, the S&P 500’s around 6% off its highs. So investors might reasonably expect Tesla – along with US stocks in general – to be heading lower even without its own bad news.
This isn’t to do with the company specifically, but it doesn’t help. A falling stock market can amplify the effects of disappointing results from the underlying business.
All of this makes a case for thinking Tesla shares could be a recipe for disaster right now. But while I’m not buying the stock right now, the long-term picture might be quite different.
Robotaxis
As I see it, what matters most to Tesla over the long term is its robotaxi network. Unlike car sales, this doesn’t show up anywhere in the income statement, but this could be about to change.
The biggest obstacle is regulation, but I think Elon Musk’s role in the government might help with this. And if so, the game could change considerably.
I wouldn’t be surprised to see Tesla shares struggle this month as the firm reports its quarterly earnings. But I don’t think this is what long-term investors should be focusing on.
In my view, the viability of the stock comes down to autonomous vehicles. There’s too much risk for my money, but for investors looking to be more adventurous, it might be worth considering at today’s prices.
