I’ve recently been doing a bit of selling in my ISA portfolio to lock in returns and raise cash. So I’m on the lookout for a stock to buy. Tesla (NASDAQ: TSLA) has caught my eye, as it’s currently 31% lower than it was in December.
Should I buy the dip? Here are my thoughts.
Back then
I used to own Tesla shares, so I’ll outline what originally attracted me to them.
First of all, the firm was benefitting massively from the transition from traditional cars to electric vehicles (EVs). It was the undisputed global leader with an amazing brand and was growing like a weed (in a good way).
Meanwhile, CEO Elon Musk was relentlessly pursuing his vision for robotaxis and humanoid robots. With his energy at the top, I felt Tesla’s long-term growth trajectory was in good hands.
Finally, the company had far superior margins to other carmakers. This was due to pricing power it had as a premium brand, its highly vertically integrated model, and regulatory credits it sold to other automakers that needed them to comply with environmental rules.
Things have changed
Shockingly, I find that hardly any of these positives exist now. Tesla is no longer the only EV game in town, and has even been overtaken by China’s BYD.
In Q2, Tesla delivered 384,122 vehicles, down 13.5% year on year. Revenue dropped 12% to $22.5bn, with earnings coming in lighter than expected. By contrast, BYD’s sales are growing strongly.
Worryingly, the green subsidies have been axed by President Trump. Those credits accounted for roughly 39% of Tesla’s net profit last year. Without them, I fear the company could start posting losses.
As for pricing power, the firm has lost its edge here, as competition intensifies worldwide, particularly in China. Profit margins have shrunk meaningfully.
Finally, I fear Musk’s foray into politics and online culture wars have done irreparable damage to the Tesla brand.
The bots are coming on
Having said all that, robotaxis are finally on the roads of Austin, Texas, and may soon be available to the public. And reports say the firm is recruiting test drivers in New York. So this is undoubtedly positive.
Meanwhile, humanoid robots — the so-called Tesla bots — are still in development and are said to be making progress. Musk sees this market as one day being bigger than all others Tesla is pursuing.
Looking ahead though, it’s possible that Chinese firms end up dominating this robotics market, like they do in drones and increasingly EVs.
My move on Tesla shares
Historically, Tesla’s valuation has always looked stretched, making it a magnet for investors betting against the stock (the short sellers). But for the bulls, there was the electric top-line growth and growing earnings.
Now though, Musk is warning of a “few rough quarters” ahead. This doesn’t fill me with confidence, especially when the stock’s trading at 12.5 times sales and 178 times forward earnings.
Weighing things up, I’m going to pass on Tesla shares for now. I think there are more attractively priced growth stocks for my ISA portfolio.
