I no longer own Tesla stock. Why I sold.

I sold my remaining Tesla shares this week.

After acquiring shares in November 2018 along with additional purchases in January 2020, I can no longer justify owning Tesla at today’s valuation over $600 billion (Tesla reached $1 trillion valuation in October last year). Interestingly, I still believe the company can continue to lead the electric vehicle category well into the future. There are no signs the company’s ability to scale production and sales has waned. While many focus on declining Tesla market share, as I’ve written before, market share is irrelevant in a growth market like EVs. Tesla’s ability to exponentially grow sales and produce profits is more important than any naturally declining market share as more competitors enter the EV space. Tesla sold nearly 1 million EVs last year, up from just under 500,000 in 2020. Financially, Tesla’s operating margin of 12.1% is better than the margin of several legacy automakers like GM (7.3%), Ford (3.3%), and even Toyota (10.1%).

Why I sold

If the business performance of Tesla is so good, then why did I sell?

Many Tesla bulls hang their hat on the belief that the company eventually will sell 20 million vehicles. They assert that this high level of vehicle sales (more than any automaker in the world if achieved) justify a stock valuation above $1 trillion. Comparatively, Toyota sells nearly 10 million vehicles per year (one-half Tesla’s potential 20 million vehicles sold in the future). Toyota’s valuation today is only $260 billion. How can anyone explain why the valuation of Tesla can be 4 times that of Toyota while Tesla only sells twice as many vehicles? They cannot. Even accounting for Tesla’s operating margin advantage cannot explain the company’s massive valuation above a well-run automaker like Toyota.

Other Tesla investors include a future FSD business (full self drive) that they believe is destined to drive Tesla’s valuation higher. For example, ARK Invest’s, Tasha Keeney, recently presented a Tesla valuation target of $4.6 trillion. Keeney believes one-half of this valuation is attributed to a future Tesla FSD business. In fact, the primary reason I acquired Tesla shares initially was due to the promise of a new revenue generating FSD business. Elon Musk and others have advanced the idea that Tesla had such a massive data advantage required to train its artificial intelligence neural network that the company would be first-to-market with self driving vehicles. Recently, however, the idea that Tesla has any advantage in self driving data has been debunked. Additionally, the company’s usage of camera-only hardware (versus the addition of radar and Lidar that most others use in addition to cameras) actually requires massive amounts of AI data analysis that it now seems Tesla cannot process. Thus, any new source of revenue that an FSD business could provide seems much less likely. And without a new AWS-like revenue source, the future of Tesla as a very big EV automaker, does not justify any higher valuation.

One must admit that part of the appeal of Tesla as an investment has been the favorable opinion of Elon Musk. Some of the company’s valuation is directly attributable to Musk and his ability to use social media to drive the share price higher. However, Musk’s recent antics have caused some of the bloom to fall off the Tesla stock price rose. This period now feels like a transition to a time where Musk, the brilliant entrepreneur, is becoming Elon, the petulant billionaire who’s behavior now is being questioned by once previous supporters. This clearly is having an impact on the share price of Tesla during the current market decline. Tesla stock has declined 28% this year (50% from it’s all time high in November), while Apple is off only 17%.

Don’t let Tesla’s rapidly growing EV business prevent you from answering the question, “can the future of this business alone drive massive valuation of Tesla today?” In my opinion, being a large, efficient EV automaker does not equate to a plus-trillion-dollar company. There must be other sources of revenue beyond selling one car at a time to consumers - even selling to 20 million consumers. The promise of FSD as a new business could satisfy the kind of recurring revenue endeavor required to grow Tesla’s valuation. Elon Musk has promised the deployment of fully functioning FSD frequently for several years. Many investors are now questioning the validity of these projections while at the same time becoming less enamored by the Musk driven “Tesla Twitter-verse” helping to push the share price higher.

Over half of Tesla’s value could be attributed to robotaxi business, says Ark Invest’s Tasha Keeney

TaaSMaster, LLC is not a registered investment advisor or broker/dealer. All investment opinions expressed by TaaSMaster, LLC are from personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors may occur.