Cathie Wood's Tesla Bet Pays Off Again. But How Long Can It Last?

Key Points

• Tesla is part of the Magnificent Seven.

• The stock has richly rewarded long-term investors.

• The company faces significant challenges, however.

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Cathie Wood, CEO of Ark Invest, oversees numerous exchange-traded funds (ETFs), including a family of funds that invest in technology stocks.

These funds have had some success in the past, with the Ark Innovation ETF (NYSEMKT: ARKK), the largest one under the company's umbrella, returning nearly 60% over the past year through June 30. That's nearly four times the Nasdaq Composite's 15.7% return during that time.

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But the fund isn't necessarily for the faint of heart, given its concentration in the tech sector. It seeks to invest in companies at the forefront of "disruptive innovation. One of the Ark Innovation ETF's biggest winners has been Tesla (NASDAQ: TSLA). As of July 2, the fund owned about 2.1 million shares of the electric vehicle (EV) maker. That stake, worth over $630 million, represented 9.6% of the fund's assets, making it the ETF's biggest position.

But can Tesla continue to rocket upwards, or is it due for a crash landing?

Image source: Getty Images.

Tesla's electric returns

Tesla, one of the "Magnificent Seven" group of technology stocks, has produced strong returns for shareholders. In 2024, the stock gained 62.5%, easily besting the S&P 500's total return of 25% and the Nasdaq Composite's total return of 29.6%.

Tesla's automotive business produces most of the company's revenue. In 2024, this fell 6% to $77.1 billion due in part to lower EV prices. Including services (e.g., used vehicles, maintenance services, supercharging, and insurance), the top line from that segment dropped 3% to $87.6 billion.

Its other major revenue source is the energy generation and storage segment, which was a bright spot. That business includes selling, leasing, and financing solar energy generation and storage products, and it saw a 67% increase in revenue to $10.1 billion. However, it made up only about 10% of Tesla's total revenue.

Has the stock boom ended?

Arguably, Elon Musk's relationship with Donald Trump, both during the campaign and his presidency, likely contributed to the stock price growth last year. But Musk and Trump have had a falling out, and it's difficult to analyze a company's long-term prospects based on personal relationships with politicians. The stock has lost 21.9% this year through July 2, badly lagging the S&P 500, which has gained 6.8%.

Additionally, portions of the Republicans' recently passed tax and spending bill would seem to hurt Tesla's prospects. The new law eliminates the federal tax credits for electric vehicles and solar energy systems, which makes those products more expensive for consumers.

Tesla was already facing challenges, including China-based EV giant BYD (OTC: BYDD.F) (OTC: BYDDY), which has been slashing its prices. The fierce competition has negatively affected Tesla's results. Tesla will report its second-quarter results at the end of the month, but its first-quarter automotive revenue dropped by 20% to $14 billion. That results in a total top-line drop of 9%, and its operating income under generally accepted accounting principles (GAAP) fell by 66% to $399 million.

Management has already published its second-quarter vehicle delivery numbers, which showed that its sales remain under pressure. It delivered about 384,000 cars in Q2, compared to over 422,000 in the prior-year period.

Management has been investing in new technologies and products, like the fully autonomous Cybercab, which is scheduled to go into production next year. There's a potentially large market for such vehicles, and for the robotaxi service Tesla intends to build, but it's one fraught with challenges. The race to autonomous driving has seen a number of false starts from other companies.

It's hard to bet against a Musk-run company given the success he's had in his various ventures. However, given the challenges Tesla faces and its high valuation -- it trades today at a price-to-sales ratio of 11.6 and a price-to-earnings ratio of 173 -- I'd stay away from the stock. And for investors in the Ark Innovation ETF, I wouldn't expect the EV stock to be the biggest positive driver of the fund's future returns.

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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends BYD Company. The Motley Fool has a disclosure policy.