Tesla Stock: 5 Key Concerns

Jul. 27, 2023 11:01 AM ET Tesla, Inc. (TSLA)

Summary

• The stock of Tesla, Inc. has risen nearly 150% in 2023 after a massive 14-month decline.
• By many key valuation metrics, Tesla shares appear priced for perfection even as the company continues to ramp up production at an impressive pace.
• Five key concerns shareholders should have around Tesla after the massive rally in its stock year-to-date are highlighted below.
• I am Bret Jensen, an analyst with over 13 years of experience in the biotech sector. I lead the investing group The Biotech Forum where we focus on proprietary, breaking research on biotech and biopharma stocks.

The stock of Tesla, Inc. has surged nearly 150% in 2023 following a prolonged decline. However, investors should be aware of several key concerns after this massive rally:

1. Valuation: Tesla’s shares seem to be priced for perfection based on traditional valuation metrics. While some investors may not consider traditional measures relevant for a company at the forefront of the electric vehicle (EV) revolution, the stock’s forward earnings multiple of almost 90 and forward revenue multiple of nine are significantly higher than those of traditional auto manufacturers like Ford and General Motors.
2. Consumer Demand/Interest Rates: Rising interest rates, driven by the Federal Reserve’s aggressive monetary policy, have increased borrowing costs for consumers. This includes higher auto loan rates, potentially impacting demand for electric vehicles, including Tesla’s. If interest rates continue to rise, it could become a considerable headwind for the entire auto industry.
3. The Law Of Large Numbers: As Tesla continues to scale up production to meet growing demand, it faces challenges related to the supply chain and manufacturing complexities. While it was relatively easier to build facilities for lower production volumes, increasing capacity to millions of vehicles annually presents unique hurdles that could multiply in complexity.
4. Declining Operating Margins: Tesla’s operating margins, which have been higher than the auto industry average, are starting to decline. In the second quarter, the GAAP operating margin fell to 9.6% from 11.4% in the first quarter and 14.6% a year earlier. This decline could be a significant concern, especially as the company is rapidly increasing vehicle delivery.
5. Musk’s Many Distractions: Elon Musk, CEO of Tesla, is involved in managing both Tesla and SpaceX, and his recent purchase of Twitter has added further distractions. These external ventures might divert his attention and lead to increased scrutiny from regulatory bodies, potentially creating uncertainty for Tesla and its shareholders.

Considering these concerns, investors should carefully evaluate their investment decisions in Tesla. While the stock has seen significant growth, these key factors may impact its future performance and warrant cautious consideration.

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