3 Reasons TSLA is Risky and 1 Stock to Buy Instead

What a time it’s been for Tesla. In the past six months alone, the company’s stock price has increased by a massive 61.7%, reaching $408.09 per share. This run-up might have investors contemplating their next move.

Is now the time to buy Tesla, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Do We Think Tesla Will Underperform?

We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons you should be careful with TSLA and a stock we'd rather own.

1. Weak Sales Volumes Indicate Waning Demand

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Automobile Manufacturing company because there’s a ceiling to what customers will pay.

Tesla’s units sold came in at 384,122 in the latest quarter, and over the last two years, they grew by 1.2% annually. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

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 3.9 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 6%.

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

We see the value of companies helping their customers, but in the case of Tesla, we’re out. Following the recent surge, the stock trades at 200.8× forward price-to-earnings (or $408.09 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.

Stocks We Would Buy Instead of Tesla

Trump’s April 2025 tariff bombshell triggered a massive market selloff, but stocks have since staged an impressive recovery, leaving those who panic sold on the sidelines.

Take advantage of the rebound by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today.

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