Tesla (NASDAQ:TSLA) reported fairly dismal third-quarter results. Worse, the automaker looks poised to continue losing significant market share in both the U.S. and China. Meanwhile, the valuation of TSLA stock remains very high. Not helping, the firm also faces meaningful regulatory threats. Given these points, I believe that investors should sell TSLA stock at this point.
TSLA Stock: Weak Q3 Results
Tesla’s automotive revenue climbed just 5% last quarter versus the same period a year earlier, while its overall EBITDA, excluding certain items, plunged 24% year-over-year (YoY) to $3.76 billion. Even more dismal was its free cash flow. That number tumbled an incredible 74% YOY to $848 million.
Tesla CEO Elon Musk seemingly tried to attribute the poor results to high interest rates, saying that “We have to make our cars more affordable for people to buy, and I keep harping on this interest thing, but it’s just the interest rate raises the cost of the car,” as quoted by Fox Business.
While high rates certainly hurt Tesla and all other automakers, I believe that the company’s steepening competition and market-share losses are the main reasons behind the huge declines in its Q3 profits.
Likely Continued Market Share Losses
As I noted in a prior column, the automaker’s share of the U.S. EV market fell to 50% in its third quarter from 64% during the same period a year earlier. Moreover, its share of the Chinese EV sector fell to 9.89% in Q3 from 13% in Q2.
Meanwhile, multiple factors are likely to keep causing Tesla’s market share to fall. One of these factor are cheaper EVs made by China-based companies such as BYD (OTC:BYDDF), Li (NASDAQ:LI), and Xpeng (NASDAQ:XPEV) that are likely to continue to gain market share in China at Tesla’s expense for some time.
Similarly, in the U.S., EVs made by other automakers, including Hyundai, BMW (OTC:BMWYY), Mercedes (OTCMKTS:MBGYY), and Rivian (NASDAQ:RIVN) have been growing much faster than Tesla. Likely to exacerbate Tesla’s issues worldwide over the longer term is the fact that at least two automakers — Mercedes and Xpeng — appear to have developed more reliable, comprehensive self-driving technology than Tesla at this point.
Indeed, The Verge in August reported that “There have been hundreds of crashes involving Tesla vehicles using FSD and Autopilot and dozens of deaths.” Further, many regulators, including the U.S. Department of Justice, are probing the automaker’s advanced driving assistance systems (ADAS).
If one or more of those agencies issue negative reports on Tesla’s ADAS systems and/or ban them, Tesla’s market share losses are likely to sharply accelerate.
A Very High Valuation
Tesla has a forward price-earnings ratio of nearly 67. That’s a very high valuation for a company whose market share is sinking rapidly amid quickly steepening competition and whose profitability plunged last quarter.
The Cybertruck Could Rescue TSLA Stock
As I’ve stated previously, if Tesla’s Cybertruck becomes a huge hit, Tesla could take off. However, I also believed that the Tesla Semi, the company’s full-size truck released late in 2022, could take the world by storm and tremendously boost the automaker’s shares, but Tesla had only reportedly built about 70 of the EVs as of October.
Therefore, although I’m encouraged by Tesla’s statement that it’s ready to produce more than 125,000 Cybertrucks annually, I’ll wait for the company to release strong delivery data on the EV before changing my currently bearish view on TSLA stock
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
