There are some businesses out there that deserve the tip of a hat simply because of how revolutionary they have been and the disruption they have caused. Most people would agree that Tesla (NASDAQ: TSLA) fits into this category of industry trailblazers.
This top electric vehicle (EV) stock has worked out tremendously well for investors, as it has skyrocketed 1,100% in the past 10 years. But as Tesla trades an alarming 49% off its all-time high, you might be considering adding the business to your portfolio on the dip.
Don't get me wrong. Tesla is great, particularly because of its innovation, but here are three key reasons why you shouldn't buy it.
Hitting a speedbump
Part of Tesla stock's downfall has to do with its disappointing financial results. Long gone are the days when the business was reporting monster growth.
Tesla registered a soft, single-digit, year-over-year sales gain in the last six months of 2023. And after revenue dropped almost 9% in this year's first quarter, it was up by just 2.3% in the June-ended quarter.
Financial results that once resembled a hypergrowth-software enterprise are now looking like a typical car manufacturer. Tesla can't escape the current macroeconomic climate, one in which consumers feel less inclined to spend on expensive EVs in a higher interest rate environment.
Competition is also fierce. Tesla isn't the only game in town. Both domestic and international rivals want a piece of the EV market. To remain competitive, Tesla has had to cut pricing on its vehicles, which has eaten away at margins.
Delays are normal
The monumental rise of Tesla's stock can definitely be partly attributed to the success of its EV operations. After all, it's astonishing that the Model Y was the best-selling car on the planet in 2023.
However, another important factor that has led to the market's love affair with this business deals with what Tesla could be in the future. Will it be a leading battery producer, robotics manufacturer, or operator of a global fleet of robotaxis? The fact that it's difficult to know the answer is worrying.
Founder and CEO Elon Musk is a visionary. No one denies that. And he deserves so much credit for constantly pushing the envelope. But he has a history of overpromising and underdelivering when it comes to the time line of product introductions. This makes it challenging to be a long-term investor.
An expensive stock
In November of 2021, Tesla traded at a nosebleed price-to-earnings (P/E) ratio of almost 400. Thanks to the stock's fall, it now sells for a P/E multiple of 60. Nonetheless, I still view this as being expensive.
Tesla remains a story stock. The aura around Musk has and likely will continue to warrant a premium from the market. I don't think this is a bet worth taking.
If you're seriously thinking of buying this stock today, one thing you have to believe with absolute certainty is that the business will return to strong revenue growth and healthy margin expansion. I'd like to give Tesla the benefit of the doubt here, but given the intense competition in the EV industry, coupled with consumers just not as interested in buying these cars as they once were, it's not hard to have a tempered outlook.
Moreover, prospective buyers need to believe that Musk will one day shock the world and realize his robotaxi dreams. Due to there being so much uncertainty as to the ultimate outcome, I have zero clue if this will ever happen.
What Tesla has accomplished thus far is truly amazing. But there are compelling reasons to pass on the stock.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
Tesla Is Great. Here's Why You Shouldn't Buy It was originally published by The Motley Fool