by Key Points
Tesla is included in the group of the Seven Magnificent.
The stock has provided substantial returns to those who have held it for an extended period.
The business encounters major difficulties, nevertheless.
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Cathie Wood, the chief executive of Ark Invest, manages a variety ofexchange-traded funds (ETFs),including a group of funds that allocate capital to technology-related equities.
These resources have experienced some success in the past, with theArk Innovation ETF (NYSEMKT: ARKK), the biggest one under the company's name, generating almost 60% over the last year up to June 30. That's almost four times theNasdaq Composite15.7% return during that period.
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But the fund isn't always suitable for those who are easily intimidated, considering its focus on the technology industry. It aims to invest in businesses leading the way in "disruptive innovation." One of the top performers of the Ark Innovation ETF has beenTesla (NASDAQ: TSLA). By July 2, the fund held approximately 2.1 million shares in the electric vehicle (EV) company. This holding, valued at more than $630 million, accounted for 9.6% of the fund's total assets, marking it as the ETF's largest investment.
But can Tesla keep soaring higher, or is it headed for a downfall?
Tesla's electric returns
Tesla, one of the "Magnificent Sevena collection of technology stocks, has delivered impressive returns for investors. In 2024, the stock increased by 62.5%, significantly outperforming theS&P 500The overall return of 25% and the Nasdaq Composite's overall return of 29.6%.
Tesla's automobile division generates the majority of the company's income. In 2024, this segment declined by 6% to $77.1 billion, partly because of reduced electric vehicle prices. When including services such as pre-owned cars, maintenance, supercharging, and insurance, the total revenue from this area decreased by 3% to $87.6 billion.
Another significant source of revenue for the company is the energy generation and storage division, which performed well. This segment involves the sale, rental, and financing of solar energy generation and storage solutions, and it experienced a 67% rise in revenue, reaching $10.1 billion. Nevertheless, this accounted for roughly 10% of Tesla's overall revenue.
Has the surge in stock prices come to an end?
It could be argued that Elon Musk's association with Donald Trump, both during the campaign and throughout his time in office, probably played a role in the stock's increase last year. However, Musk and Trump have since experienced a rift, making it challenging to assess a company's long-term potential based on personal ties to politicians. The stock has declined by 21.9% this year up to July 2, significantly underperforming the S&P 500, which has risen by 6.8%.
Furthermore, parts of the Republican-led tax and spending bill that was recently approved could negatively impact Tesla's future. The updated legislation removes federal tax incentives for electric vehicles and solar energy systems, causing these items to cost more for buyers.
Tesla was already encountering difficulties, including the Chinese electric vehicle giantBYD (OTC: BYDD.F) (OTC: BYDDY), which has been reducing its prices. Intense competition has had a negative impact on Tesla's performance. Tesla will release its second-quarter results at the end of the month, but its first-quarter automotive revenue fell by 20% to $14 billion. This leads to an overall revenue decline of 9%, and its operating income underGenerally Recognized Accounting Principles (GAAP)dropped by 66% to $399 million.
The company has already released its second-quarter vehicle delivery figures, indicating that sales are still facing challenges. It delivered approximately 384,000 vehicles in Q2, down from more than 422,000 in the same period last year.
The company has been focusing on developing new technologies and products, including the fully self-driving Cybercab, set to begin manufacturing next year. There is a significant potential market for these vehicles, as well as for the robotaxi service Tesla plans to develop, although this area comes with numerous difficulties. The competition in achieving full autonomy has led to several unsuccessful attempts by other firms.
It's challenging to wager against a company led by Musk, considering his track record of success across different businesses. Nevertheless, with the difficulties Tesla is encountering and its elevated valuation — currently having a price-to-sales ratio of 11.6 and a price-to-earnings ratio of 173 — I would advise steering clear of the stock. For those invested in the Ark Innovation ETF, it's unlikely that electric vehicle stocks will be the primary factor boosting the fund's future performance.
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Lawrence Rothman, CFAdoes not hold any position in the stocks listed. The Motley Fool holds positions in and advises on Tesla. The Motley Fool recommends BYD Company. The Motley Fool has adisclosure policy.
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