For a long time, I’ve traded around or against Ark Invest — an investment firm owned and operated by Cathie Wood. The ARK Innovation ETF (NYSE: ARKK) — Wood’s flagship vehicle — has fallen 68% over the past year and continues to bleed value as investors face a recession and spiraling valuations.
Over the past week, the fund took an 11% spill largely due to its largest holding, Tesla Inc. (Nasdaq: TSLA).
Tesla entered breakdown territory on Nov. 1, and has plunged from about $200 per share to just under $170. The pullback in TSLA has fostered interest among certain buy-the-dip investors who argue the company offers a best-in-class combination of disruptive innovation and long-term potential in the electric vehicle market.
Heading into 2023, however, I’m not one of those buy-the-dip enthusiasts…
That’s why I want to share six reasons I’m avoiding TSLA stock, and the one thing that would need to change to deserve my investment dollars. Let’s dig in…
Steering Clear of TSLA
Here are the six reasons why I’m steering clear of Tesla in 2023…
- The Valuation Story
Tesla is an incredibly overvalued company. Despite the projections of market dominance, it’s still difficult to justify a price-to-earnings (P/E) ratio north of 51 times earnings, or 51X, and a price-to-sales (P/S) over 7.2.
If we look across the automotive industry, the average P/E ratio is roughly 10X. From a relative perspective, I simply won’t pay that much money for profitability. Especially with so many other companies out there with strong cash flow and operations in more recession-resistant sectors.
- Competitive Pressures
People believe Tesla will dominate the EV sector for years to come… But it’s already being taken over by Volkswagen as the largest producer of EVs in the world. In addition, I anticipate that Detroit’s big two — General Motors Co. (NYSE: GM) and Ford Motor Co. (NYSE: F) — are better suited to meet rising demand for EVs while also garnering political favor from Washington. There are now at least 12 serious competitors to Tesla — the industry has caught up.
- The CEO Is Too Busy Tweeting
CEO Elon Musk has been in the headlines for two months, but they have nothing to do with Tesla. Musk is very distracted right now as he puts his time and energy into his takeover of social media giant Twitter. I don’t like when corporate executives are distracted, and Musk — despite his brilliance — can’t do everything. Tesla will suffer, and there’s more to it than just from a leadership perspective.
- No Insider Buying — in Years
If a company’s executives aren’t buying their own stock, why would you? There is no company out there with more aggressive insider selling over the past year than Tesla. Over that time, Musk and other executives have sold more than $27 billion in company stock — there has been ZERO buying.
In fact, Musk will likely continue to sell TSLA stock to help cover the daily shortfall at Twitter, which is currently estimated at roughly $4 million.
- There’s a 100% Chance of a Recession
I don’t have to dig too far here, but there is a very high probability of a recession in 2023. A recession will fuel lower production volume and lower profits. As fundamentals continue to return to this market, we’ll likely see Tesla stock continue its pullback.
- Chinese Pressures and Patriotism
There remains a wealth of questions about Twitter’s focus on China — and how that will impact Tesla. China has its own companies like Nio Inc. (NYSE: NIO) that are growing their market share in the nation. In addition, the ongoing divide between the U.S. and China has more citizens there turning to their own producers as a sign of patriotism.
Why I’d Buy Tesla?
There’s only one scenario where I’d purchase Tesla stock in the months ahead…
The Federal Reserve.
If the Fed pivots from its position on interest rates or its balance sheet, then the era of new quantitative easing is upon us. Over the past decade, companies with comical valuations like TSLA can squeeze higher and higher. If the Fed starts accommodating the market again with lower rates and cheap money, Tesla will be a buy.
However, I remain confident the Fed will maintain its course in 2023. With interest rates set to rise — as high as 7% according to St. Louis Fed President James Bullard — I will actively avoid Tesla and short funds that own the stock.
Enjoy your Thanksgiving,
Garrett
