Tesla’s Stock Faces a ‘Death Cross’: Why It May Be a Risky Buy

Introduction

Tesla Inc. (TSLA) is on the cusp of a significant warning sign for investors—a “death cross.” This technical indicator occurs when the 50-day moving average falls below the 200-day moving average, suggesting potential further declines in the stock price. Given these ominous signals, investors should scrutinize the facts before diving in.

1. Slumping Vehicle Sales

Tesla’s automotive sales are showing troubling signs. The company has reported an 8% decline in fourth-quarter revenue from the previous year, with its market share dropping from a commanding 80% in 2020 to just 49% in 2024, according to data from Kelley Blue Book. Traditional auto manufacturers are stepping into the electric vehicle (EV) arena, capturing more of the market share. If Tesla can’t maintain its leadership position, the implications for its stock price could be dire.

Prospective investors should consider that Tesla predominantly relies on its consumer vehicle sales for revenue—77% to be exact. With recent consumer sentiment shifting negatively due to protests, vandalism, and a general backlash against CEO Elon Musk’s political affiliations, it is unclear how this brand damage will translate into future sales.

2. Unreasonable Valuations

When assessing Tesla, one of the first red flags is the company’s towering valuation metrics. Current estimates place Tesla’s forward price-to-earnings (P/E) ratio at 85.1, in stark contrast to Ford’s (F) modest 7. This elevated valuation suggests that investors are operating under the assumption of robust growth. Yet with declining sales figures, some are starting to question if such lofty expectations are grounded in reality.

Garrett Nelson from CFRA has pointed out that comparing Tesla against traditional automakers is misguided, as Tesla has historically traded more like a tech company. However, a high valuation requires sustained strong growth, which the company is currently struggling to deliver. As concerns mount, institutional investors are likely to think twice about stepping in.

3. Political Backlash and Brand Sentiment

Tesla’s current troubles aren’t solely financial. Political sentiments surrounding Elon Musk and his association with the Trump administration have negatively impacted the company’s brand image. Incidents of vandalism against Tesla vehicles and charging stations illustrate a severe consumer backlash against the brand. According to a YouGov survey, 37% of respondents stated that Musk himself has influenced their decision to avoid owning a Tesla.

For those who argue that sentiment may rebound, one only needs to look at recent trends to be skeptical. A similar boycott that befell Bud Light resulted in plummeting sales and stock prices. The long-term effects of such backlash against Tesla could be detrimental to its ongoing performance and stability.

Looking Ahead: Can Tesla Recover?

Despite these glaring risks, some analysts maintain a bullish outlook on Tesla. Potential positives include its steeply beaten-down stock price, which some view as presenting a margin of safety for bargain hunters. Analysts from FactSet list an average price target of $342, far above the current price around $252. This discrepancy demonstrates the potential room for growth, should sentiment shift in Tesla’s favor.

Aside from its core automotive business, Tesla is also making strides in energy generation and storage, with revenue from this sector growing by an impressive 67% last year, even as automotive sales dropped. The company may find future success in autonomous vehicles and robotics, positioning it well in the burgeoning artificial intelligence market—a potential game changer.

Conclusion

In summary, while Tesla remains a household name synonymous with electric vehicles and tech innovation, the current landscape is fraught with challenges. With slumping sales, unsustainable valuations, and significant political backlash, prospective investors may be wise to proceed with caution.

Investors who value traditional financial principles must weigh these risks carefully, using sound judgment rather than mere hype or sentiment. As ever, while the potential for recovery and growth exists, one must approach Tesla’s stock with a clear understanding of the headwinds it currently faces.

Stay informed, keep your conservative foot forward, and remember: A principled approach to investing is key to navigating these turbulent waters.