The stock market’s been getting a little hot in places. And for now at least, I’m a little concerned about these two high-profile car stocks — Tesla (NASDAQ:TSLA) and Ferrari (NYSE:RACE).
Let me explain why I wouldn’t go anywhere near them today.
Waiting for a Robotaxi
As a car stock, Tesla’s vastly overvalued. Even Elon Musk knows this, asking investors to consider the company as a tech stock, and not an entity that only makes cars.
The problem is, it currently trades at 70 times forward earnings, and 81.1% of revenue comes from car sales. While Tesla’s energy generation and storage revenue hit $6bn in 2023, it’s still a small part of the business.
So why is the stock still so expensive? Well, Musk has promised that the long-awaited — and I mean years overdue — Robotaxi will be unveiled on 8 August.
This could be a game-changer for the company, opening up new revenue streams. Among other things, Tesla could operate as an automated taxi company.
It could generate billions through the sale of excess computation power. That’s because autonomous vehicles will need powerful computers. These won’t be fully utilised because we don’t drive our cars 24 hours a day.
However, I’m not sure what Tesla will actually unveil in August. After all, a fully autonomous vehicle would be ‘Level Five’ autonomy — its current vehicles are only ‘Level Two’.
Moreover, it was recently reported that Musk has diverted thousands of Nvidia’s H100 artificial intelligence (AI) chips, that were intended for Tesla, to X (formerly Twitter). That’s also a worry because, surely, these AI-dependent vehicles will need them.
In short, I wouldn’t touch Tesla with a bargepole today because I’m concerned Musk might be overpromising. It’s also worth remembering that he gave us the Robotaxi unveiling date shortly after a disappointing set of Q1 results. It smacked of a distraction.
Nonetheless, if Tesla can pull the cat out of the bag, I’d certainly be keen to re-evaluate my position.
Figures just don’t add up
Ferrari’s an amazing company. It has the strongest margins in the car-building industry — its gross profit margin is 49.8%.
These margins are only possible due to Ferrari’s brand recognition — at the pinnacle of luxury sports vehicles — and its restrictive supply.
Founder Enzo Ferrari once said: “Ferrari will always deliver one car less than the market demands.”
However, for me, the figures just don’t add up. I’ve previously been neutral on the stock, acknowledging that investors simply love great businesses. But, let’s face it, Ferrari’s trading at 48 times forward earnings and that’s too expensive.
It simply comes down to the fact that margins are already extremely high and because Ferrari can’t boost production because its against the business model. Higher production could also put margins under pressure.
The Purosangue SUV is going to be produced in greater quantities than other models. However, Ferrari’s total deliveries are unlikely to move beyond 15,000 anytime soon.
It’s a great company, but it’s too expensive for me at the moment.
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James Fox has position in Nvidia. The Motley Fool UK has recommended Nvidia and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
