What a brutal six months it’s been for Tesla. The stock has dropped 23.5% and now trades at $325.10, rattling many shareholders. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Tesla, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Tesla Not Exciting?
Despite the more favorable entry price, we're swiping left on Tesla for now. Here are three reasons why there are better opportunities than TSLA and a stock we'd rather own.
1. Lackluster Revenue Growth
Long-term growth reigns supreme in fundamentals, but for disruptive companies like Tesla, a stretched historical view may miss emerging trends in autonomous vehicles and energy. Tesla’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 5.5% over the last two years was well below its five-year trend. 
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills or invest for the future.
As you can see below, Tesla’s margin dropped by 4 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle as it pursues new AI technologies such as a robotaxi or humanoid robot fleet. Tesla’s free cash flow margin for the trailing 12 months was 7.1%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. While Tesla’s ROIC fell recently due to its price cuts, the broader trend is still healthy as its ROIC is higher than a few years ago. This is because it’s investing aggressively to capture the AI opportunity. Only time will tell if these investments bear fruit in higher long-term ROICs.
Final Judgment
Tesla isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 124.9× forward price-to-earnings (or $325.10 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward one of our all-time favorite software stocks.
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