I’m Having Doubts About Tesla’s Future. I Will Sell Tesla Stock.

I initially purchased Tesla stock in November 2018 at $68/share. I purchased more shares in January 2020 at $85, an amount worth nearly one-half of the original purchase. As Tesla’s valuation grew to become a larger component of my individual stock portfolio, I rebalanced my position by selling all of the 2020 shares and 35% of the 2018 shares in January this year. As of June 1, my total realized and unrealized gain on Tesla stock is 838%. That’s an impressive return after only 2 1/2 years of ownership.

Today, however, I’m less sure about Tesla’s Insurmountable Advantages. Several legacy automakers, well-funded new EV firms like Rivian, and several Chinese EV companies are poised to challenge Tesla’s early EV dominance. Investors are rewarding some legacy automakers today for their EV business plans while becoming more cautious about Tesla. While Tesla stock has declined 15% this year, General Motors has increased 47%; VW is up 58%; and Ford has climbed 74%.

The future $10 trillion global market expected to develop around autonomous vehicle technology now seems to be a space where Tesla might only be a minor player versus dominating the category. Autonomous technology development is being attacked by many firms, with some like Alphabet, Amazon and Apple having almost unlimited resources and engineering expertise. While others like Cruise have significant funding from GM, Honda, SoftBank and Microsoft. Many Tesla fans assume the company has an advantage in self-driving technology based on having more real-world data from the fleet of vehicles in consumers hands. But Elon Musk’s insistence on a camera-only solution to autonomous capability seems to require more data and neural network development versus the companies relying on cameras, radar, and LiDar. Musk’s dream of a robo-taxi business of Teslas transporting commuters during periods when the vehicles are not being used by owners increasingly appears unreasonable in the near-term.

Many investors focus on how Tesla does not make money directly from selling cars. In the most recent quarter, it was the combination of emissions credits and bitcoin sales that drove the company to an accounting profit. While profits ultimately are the measuring stick for all companies, I do not focus much on profits for early growth firms like Tesla. Revenue, revenue growth, and sources of revenue are primary considerations for me. However, it will not be enough for Tesla revenue to come primarily from selling EVs. Musk seems to understand this as well. Insurance, service, a future robo-taxi business, performance over-the-air vehicle updates (OTA), and subscription payments for full-self-driving capability are all examples of Tesla attempting to create recurring revenue bundles (rundle). However, this is not a Tesla competitive advantage any longer. Legacy automakers have discovered the value of the rundle as well. For example GM sells OnStar subscriptions, financial services, insurance, subscriptions to Super Cruise self-driving, and likely new OTA updates in the near future as well. Rundles are now an important business strategy for all automakers. In fact, it only will be the auto companies without significant sources of rundle businesses that will be most uncompetitive.

Many believe Tesla will one day sell 20 million electric vehicles. That would be a massive amount of vehicle sales for one automaker. The two largest automakers in the world, the Toyota Group and the VW Group, each sold 9.5 million vehicles and 9.3 million vehicles respectively in 2020. Tesla sold 500,000 cars in 2020, which is an impressive quantity of vehicle sales for an automaker with an EV-only portfolio and only two volume models (Model 3 and Model Y). This year, total global vehicles sales will reach 70 million vehicles. By 2030, sales are expected to climb to 79 million vehicles globally. For Tesla to sell 20 million vehicles, many automakers like VW and Toyota will have to lose massive amounts of sales volume and market share. Tesla’s share would grow from 0.8% today to 25% by 2030. While not impossible, this would require the top legacy automakers to ignore the industry disruption which is clearly evident today and primarily driven by Tesla. Many legacy automakers are committed to a future automotive world of dramatically fewer ICE vehicles and a massive increase in electric vehicles across the world.

Tesla’s valuation of $570 billion would make more sense if the future outlook for the company included volume leadership in automotive sales, better future margins than competitors, better rundle services not duplicated by others, and maybe an entirely new business like Amazon’s very profitable cloud AWS business. I don’t believe any of these will occur. The EV technological head start enjoyed by Tesla will erode (maybe Tesla’s software integration core competence advantage might remain in the short term). Legacy automakers now understand the threat Tesla poses to their business. I imagine Ford will use every resource in their arsenal (including the recent reveal of an electric F150) to insure that a Tesla Cybertruck will not threaten over 40 years of truck sales dominance in the U.S. Maybe Tesla’s energy business could become their version of Amazon’s AWS in the future. However, that is difficult to predict.

It now seems the future world of EVs and self-driving mobility solutions will include many players. The notion of Tesla winning with all others losing is highly unlikely.

I’m planning to rebalance my portfolio again by selling more Tesla shares - selling 40% of my current holdings to bring the Tesla market value in line with the other holdings in my taGMan portfolio. You might ask given what I just discussed, why not sell all of my Tesla? Charlie Munger once said, “never underestimate the man who overestimates himself.” That man could be Elon Musk. I’m planning to maintain some investment in Tesla in case Musk proves me wrong and Charlie Munger is correct.

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.