This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

During the first half of 2021, meme stocks like GameStop (NYSE: GME) and AMC Entertainment (NYSE: AMC) took the financial world by storm. Individual investors piled into shares of a handful of companies -- particularly beaten-down, heavily shorted stocks -- quickly making huge gains. As the stock prices soared, many of these traders used social media platforms to celebrate and to urge others to continue buying.

Over the past year, though, meme stocks have lost much of their lustre. Indeed, meme stocks' best days are probably behind them. In the long run, they simply cannot escape the underlying companies' poor performance.

Maintaining excitement is hard

The surge in meme stocks last year was surprising, but it wasn't unprecedented. There have been many such stock market 'bubbles' over time. However, these bubbles pop sooner or later.

In the early days of the meme stock craze, watching stocks like GameStop and AMC rocket higher was exciting. As the stocks rose, they gained more mainstream interest, leading to additional buying and even bigger gains.

But as time went by and meme stocks' gains slowed, most investors began to tune out. The resulting stock price declines made meme stocks even less exciting to the average American, as they no longer seemed like a ticket to quick riches.

The need for a devoted band of followers to prop up the share price has already doomed lesser meme stocks. For example, shares of Bed Bath & Beyond, Virgin Galactic, and BlackBerry made big gains during the peak of the meme stock craze. But over the past year, all three stocks have plummeted below pre-pandemic levels.

Three-year performance of selected meme stocks, data by YCharts.

Even AMC stock has risen less than 20% over the past three years, underperforming the broader market. Only GameStop has maintained big gains compared to 2019. And despite being the most popular meme stock, GameStop shares have fallen more than 70% from the all-time high of $483 they reached in January 2021.

A stag hunt doomed to fail

The "stag hunt" scenario from game theory also helps explain why meme stocks are poised for losses over time. In a stag hunt, everyone must work together to achieve the best outcome (capturing a stag). The risk is that some people settle for a sure thing with a smaller reward (catching a hare) and allow the stag to escape.

By acting as a group to buy (and not sell) shares of GameStop, AMC, and other names, meme stock investors generated huge paper profits last year. Even today, meme stock bulls continue to urge other investors to buy and "hold on for dear life" no matter what.

Maintaining this kind of cooperation over time is hopeless, though. Eventually, some people will choose to sell, perhaps to make a big purchase or perhaps simply to take some risk off the table. That's exactly what has happened over the past year, bringing meme stocks back to earth.

No substance to these stocks

Many years ago, investing legend Benjamin Graham aptly described the phenomenon behind meme stocks' performance. According to his most famous student -- Warren Buffett -- Graham said, "In the short run, the market is a voting machine ... but in the long run, the market is a weighing machine."

In other words, at any moment, a stock can be popular or out of favour for no good reason. But over time, a company's fundamental performance (i.e. revenue, earnings, and cash flow) is the main driver of its share price. Meme stock investors are learning this lesson the hard way.

Even at today's levels, shares of GameStop and AMC are extremely overvalued. GameStop is deeply unprofitable and burning cash rapidly. Its main growth initiative -- an NFT marketplace -- seems unlikely to fix things, given that crypto giant Coinbase's NFT marketplace has been a bust. GameStop's intrinsic value is probably closer to $1 billion than its current market cap of $10 billion.

Meanwhile, AMC would have trouble supporting its $5.5 billion debt load even if revenue and earnings returned to 2019 levels. And while theater attendance is improving, revenue remains well below pre-pandemic levels. That makes AMC's $6 billion-plus market cap very hard to justify.

In short, while the past year has been rough for meme stock investors, the future could be even worse, barring an unlikely surge in profits at GameStop and AMC.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and recommends Coinbase Global, Inc. The Motley Fool recommends BlackBerry. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

In the early months of the COVID-19 pandemic, Netflix (NASDAQ: NFLX) benefited from a huge wave of new subscriber signups, as people looked for things to do at home during lockdowns. However, subscriber growth has been slowing ever since that initial surge cooled off in the spring of 2020.

Last week, investors finally lost their patience. Weaker-than-expected fourth-quarter subscriber growth and a fairly dismal forecast for the first quarter caused Netflix stock to plunge 22% on Friday. Yet this pullback could make Netflix an attractive value stock in 2022.

Management finally admits that growth is slowing

Netflix's subscriber growth moderated significantly in 2021. The company grew its paid streaming membership base by 18.2 million users last year. For comparison, Netflix reported a record 36.6 million paid net additions in 2020, and it averaged just over 28 million paid net additions over the previous two years.

In short, Netflix expanded at a much slower pace in 2021 than it did before the pandemic. Its growth slowdown looks even more dramatic in percentage terms. In 2021, Netflix grew its paid streaming subscriber base just 9%, compared with a 26% increase in 2018.

Despite clear signs that growth was slowing, Netflix executives spent most of last year arguing that the deceleration in subscriber growth was temporary.

Management finally acknowledged the obvious in conjunction with the company's Q4 earnings release. Netflix reported 8.3 million paid net subscriber additions for the fourth quarter -- slightly below its Q4 2020 performance and its forecast -- and it expects to add just 2.5 million subscribers in the first quarter (down from 4 million a year ago). CFO Spence Neumann said that subscriber retention has been healthy but the pace of new member acquisitions hasn't recovered to pre-pandemic levels.

Netflix stock plummets

Investors punished Netflix stock viciously for the subscriber miss. Barely more than two months ago, the shares hit an all-time high of $700.99. The stock had already retreated to just above $500 before Netflix's earnings report, largely because of a broader sell-off in high-flying tech stocks. Netflix stock dropped another 22% after the earnings report, pushing the shares below $400 for the first time in almost two years.

Netflix stock performance, data by YCharts.

The abrupt pullback is hardly surprising in light of Netflix's recent results and forecast. For many years, Netflix has been valued as a growth stock. Now, investors have to reckon with the fact that Netflix may be close to saturating many of its markets. If the company's Q1 guidance is any indication, subscriber growth could moderate again to roughly 6%-8% this year.

To be fair, price increases should keep Netflix's revenue growing at a double-digit rate in 2022. (Netflix is raising the prices of most plans by 10% to 11% in the U.S. and Canada this quarter.) But that was a small consolation to investors, as Netflix risks further handicapping its subscriber growth if it raises prices too much.

Could Netflix be a good value stock?

While Netflix is falling out of favor with growth-focused investors, it is starting to gain merit as a value stock. Despite its somewhat disappointing subscriber gain, Netflix posted earnings per share (EPS) of $1.33 last quarter, easily beating its guidance and the analyst consensus of $0.82. This brought its full-year EPS to $11.24.

Netflix expects its operating margin to retreat somewhat in 2022 -- largely due to exchange rate pressures -- following several years of extremely strong margin expansion. Still, margin expansion will likely resume in 2023. Even with slower subscriber growth, the operating leverage inherent in Netflix's business model should enable the company to grow revenue faster than expenses for the foreseeable future.

Netflix stock's recent plunge has left it trading for just 35 times the company's 2021 earnings. While that still represents a premium to the market, it's a far cry from a year ago, when the stock traded for over 80 times earnings.

Netflix P/E ratio, data by YCharts.

Moreover, analysts on average expect Netflix's EPS to reach roughly $15 in 2023 and $19 by 2024. Netflix shares now trade for just 21 times the 2024 analyst consensus.

Looking ahead, earnings growth and free cash flow may become more important drivers of Netflix stock than subscriber gains. If the company can keep its costs under control, the stock could perform well for a new crop of value investors even if subscriber growth never reaccelerates. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and recommends Netflix. The Motley Fool Australia has recommended Netflix. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Just a few weeks ago, shares of Amazon.com (NASDAQ: AMZN) touched a new all-time high above $3,700. This pushed the retail and technology giant's fully diluted market cap to just shy of $2 trillion.

However, Amazon stock pulled back 8% after its late-July earnings report, as second-quarter revenue fell short of the analyst consensus and the company issued a weaker-than-expected forecast for the third quarter. While Amazon continues to produce very strong results by ordinary standards, these disappointments suggest that investors may have unrealistic expectations for the e-commerce titan.

Amazon.com stock performance, data by YCharts.

Failing to meet high expectations

Amazon generated $113.1 billion of revenue last quarter: up 27% year over year. Holding currency exchange rates constant, sales would have increased 24%. All three of Amazon's business segments posted solid gains. On a constant-currency basis, revenue rose 21% in the North America division, 26% in the international segment, and 37% for Amazon Web Services.

Most companies would love to achieve that kind of growth under any circumstances. Still, analysts had (on average) expected revenue to come in $2 billion higher.

Interestingly, Amazon's growth rate in North America trailed the broader retail industry. U.S. retail sales surged 27.8% year over year last quarter, as consumers flocked back to stores as the COVID-19 pandemic eased. Moreover, Amazon's Q2 revenue benefited from Prime Day shifting into June this year. The two-day event brought in about $7.5 billion of revenue, according to estimates from Piper Sandler analysts. (For comparison, Amazon's retail business has been generating about $1 billion of revenue on a typical day recently.)

Operating income jumped 32% year over year to $7.7 billion: near the top of Amazon's $4.5 billion to $8 billion guidance range. Nevertheless, this probably missed many investors' expectations, as the company often beats the high end of its operating income guidance by a wide margin.

More of the same ahead

Amazon's third-quarter forecast also disappointed many investors. The company projects that revenue will increase 10% to 16% year over year to a range of $106 billion to $112 billion. Meanwhile, Amazon estimates that operating income will decline from $6.2 billion a year ago to between $2.5 billion and $6 billion. The analyst consensus had called for revenue of $118.7 billion and operating income of $8.1 billion.

With Prime Day falling in the second quarter this year, investors had to be prepared for slower growth in the third quarter. Furthermore, Amazon faces tough year-over-year comparisons after revenue surged 37% in Q3 2020.

That said, it also appears that many consumers -- particularly in the U.S. -- have started to return to their pre-pandemic shopping habits due to the widespread availability of COVID-19 vaccines. During Amazon's earnings call, CFO Brian Olsavsky noted that growth had slowed to a mid-teens pace beginning in mid-May, excluding the impact of the Prime Day calendar shift.

Why investors should expect slowing growth

Prior to the COVID-19 pandemic, Amazon's growth rate had already started to moderate. On a constant-currency basis, revenue rose 22% in 2019, down from 30% in 2018 and 31% in 2017.

The pandemic drove a huge increase in e-commerce sales, reversing this trend of slowing growth. As a result, Amazon posted a 37% revenue gain in constant currency last year. However, to some extent, this just pulled forward growth that would have come in 2021 and future years. That has led to the sharp deceleration Amazon is experiencing now -- and which will likely continue in the near term.

Indeed, while Amazon's growth rate for 2020 and 2021 combined looks quite strong, U.S. retail sales have grown at an incredible pace over this period. As the tailwind from stimulus checks and reduced spending on experiences (like travel and dining out) fades, it will pressure Amazon's top-line growth. Additionally, Amazon has already crushed most of its weak competitors, which will make it harder to gain market share in the future.

Amazon stock could still potentially be a worthwhile long-term investment depending on the company's ability to expand its profit margin. However, investors will need to recalibrate their expectations for top-line growth. The low- to mid-teens growth Amazon is projecting for the third quarter could prove to be the new normal over the next several years.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Amazon. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Virtually all legacy automakers have started to invest in electric vehicles (EVs) over the past decade. In recent years, General Motors (NYSE: GM) has been one of the most aggressive with respect to EV investments.

At its EV day in early 2020, GM revealed that it would invest over $20 billion in EVs and autonomous vehicles (AVs) through 2025. Despite the shock of the COVID-19 pandemic last year, the General has increased its investment plan -- twice. This highlights General Motors' determination to improve its competitive position in the auto industry as the EV revolution plays out.

An ambitious agenda

General Motors has big plans for EVs and AVs, captured in its vision of "zero crashes, zero emissions, and zero congestion." Its Cruise subsidiary is one of the leading AV developers and is on track to commercialize self-driving taxis within a few years.

Earlier this month, Cruise became the first company authorized to offer fully autonomous ride-hailing (i.e., with no safety driver) to the public in California. And in April, Dubai selected Cruise as the exclusive provider of self-driving taxis for the city through 2029.

As for EVs, GM plans to introduce 30 new EV models globally by 2025. More than two-thirds of those will be available in North America. General Motors is betting on vertical integration -- similar to Tesla -- to give it a competitive advantage over other legacy automakers. It has created a flexible battery platform called Ultium that will serve as the foundation for its future EV models. GM is designing electric motors, batteries, and cell chemistries in house and manufacturing battery cells through a joint venture with LG Chem.

GM projects that its second-generation Ultium batteries -- which will become available in the mid-2020s -- will have double the energy density of today's batteries and cost 60% less. That could get the company's EVs close to price parity with traditional internal combustion engine (ICE) vehicles.

To accelerate its EV roadmap, GM increased its investment plans last November, telling investors it would spend over $27 billion on EVs and AVs through 2025. Yet it wasn't done.

Boosting investment plans again

On Wednesday, GM announced another huge increase to its investment plans. It now intends to spend a whopping $35 billion on engineering, capital spending, and other development costs for EVs and AVs through 2025. This will far outpace its spending on ICE vehicles over that period.

The incremental investments will allow GM to build and open two additional U.S. battery cell manufacturing plants by mid-decade, for a total of four. The first Ultium Cells plant is slated to start production in early 2022, and GM announced its plans for the second Ultium Cells plant just two months ago. The latest investment shows that GM is more worried about being short of battery production capacity than having too much.

General Motors is also ramping up investments in its HYDROTEC fuel cell platform. Moreover, it is looking for opportunities to expand beyond its core passenger auto business. It plans to develop its own electric commercial trucks, and it has struck agreements to supply fuel cells and battery systems for the heavy truck, railroad, and aviation industries.

GM can cover the bill

In conjunction with announcing its increased EV and AV investment plans, General Motors formally raised its guidance for the first half of 2021.

Earlier this month, the automaker told investors that it expected its results for the first half of the year to be "significantly better" than its earlier forecast. Last week, GM put firm numbers on that guidance increase. It expects to generate an adjusted operating profit between $8.5 billion and $9.5 billion for the period, up from its previous estimate of $5.5 billion.

CFO Paul Jacobson noted that GM will face ongoing headwinds from the industrywide chip shortage in the second half of 2021, along with significant commodity cost increases. As a result, the company hasn't updated its full-year forecast yet. Nevertheless, General Motors is likely to beat its original full-year outlook by a wide margin, thanks to its stellar first-half results.

In short, GM's core business is firing on all cylinders. As chip availability improves and commodity costs normalize -- or get passed through to consumers -- profitability could improve further. That will give the General abundant earnings power to fund its aggressive investments in EVs and AVs, paving the way for a smooth transition to the next generation of transportation.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levine-Weinberg owns shares of General Motors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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GameStop (NYSE: GME) has been one of the top-performing stocks of 2021. Shares of the meme stock skyrocketed in January, as bullish traders sparked an epic short squeeze.

Short interest has declined significantly since then. Nevertheless, interest from retail traders continues to buoy GameStop shares. Despite recent volatility -- and a 27% post-earnings plunge -- the stock is up more than tenfold year to date.

GameStop stock performance and short interest, data by YCharts.

However, the video game retailer's underlying results don't support this strong stock market performance. By any objective standard, GameStop's core business is dying. The company's first-quarter earnings report -- released on Wednesday -- highlighted its ongoing decline.

Another bad earnings report

GameStop tried to paint its Q1 performance in the best possible light. The company noted that sales increased 25% year over year to $1.28 billion, despite a 12% reduction in its store count and continued store closures in Europe. Meanwhile, GameStop's adjusted net loss shrank by more than 80% year over year to $29.4 million ($0.45 per share), beating the average analyst estimate.

Yet GameStop clearly remains in a downward spiral. The year-ago period included the peak of pandemic-related store closures. Two years ago, GameStop earned a small profit on $1.55 billion of revenue during the first quarter -- and that was considered a terrible performance. In the first quarter of fiscal 2018, GameStop posted adjusted EPS of $0.30 on $1.79 billion of revenue.

Thus, GameStop's first-quarter revenue has plunged nearly 30% over the past three years, and the retailer has swung from being solidly profitable to solidly unprofitable.

GameStop Revenue (TTM), data by YCharts.

Blaming the pandemic would be overly simplistic. After all, Best Buy (NYSE: BBY) recently reported that sales surged 36% year over year last quarter. Best Buy's first-quarter revenue has grown 27% over the past two years combined. Moreover, growth in the consumer electronics giant's entertainment segment -- which includes gaming hardware, software, and accessories -- has significantly outpaced Best Buy's overall growth over the past two years.

It gets worse

The deeper one digs, the worse GameStop's Q1 performance looks. This year, GameStop is benefiting from the launch of new Sony PlayStation and Microsoft Xbox consoles, a tailwind that only occurs once every seven years or so. Those console launches helped GameStop grow its sales of hardware and accessories by 37% year over year last quarter.

By contrast, software sales fell by nearly 5% from last year's already-depressed level, reaching $398 million. Over the past two years combined, GameStop's software sales have plunged by 46%.

This shouldn't be surprising. Consumer demand has steadily shifted toward digital downloads in recent years, disintermediating video game retailers like GameStop. Meanwhile, GameStop continues to lose share within this shrinking market to higher-traffic retailers (like Best Buy).

GameStop's eroding software sales will make it extremely difficult to return to profitability. GameStop has traditionally generated more than half of its gross profit from software and less than 10% from new hardware, which sells at notoriously thin margins.

A new strategy?

Many GameStop bulls expect that a new strategy focused on e-commerce will turn things around for the ailing retailer. Indeed, GameStop announced last week that it has appointed two Amazon.com veterans as its new CEO and CFO. (Of course, since the CEO has primary responsibility for setting corporate strategy and the new CEO hasn't even started yet, it's a stretch to say that GameStop has any strategy at all.)

However, new management and a new strategy won't change the fundamental realities weighing on GameStop's business. Software sales will continue to shift to digital downloads. Sony and Microsoft don't need GameStop's help in that department. Hardware sales will be even less profitable in an e-commerce format, where GameStop will have to absorb higher credit card fees and shipping costs.

In any case, Amazon and Best Buy are light years ahead of GameStop in e-commerce. Both have massive resources at their disposal, giving GameStop little chance of catching up.

The meme stock rally is allowing GameStop to raise huge sums of cash by selling stock to gullible investors, which will allow it to stay in business for a long time even if it never returns to profitability. But a genuine turnaround for the business (as opposed to the stock) seems as far-fetched as ever.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Microsoft. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Last May -- when Tesla Inc (NASDAQ: TSLA) shares were trading for around $150 on a split-adjusted basis -- CEO Elon Musk opined on Twitter that Tesla's stock price was probably too high.

Tesla stock price is too high imo

— Elon Musk (@elonmusk) May 1, 2020

As Tesla stock continued to rise during the remainder of 2020 and sustained its massive gains, Musk began to change his tune. By the time Tesla held its fourth-quarter earnings call last week, the stock had more than quintupled from the level that Musk had considered "too high" less than a year ago. Nevertheless, the Tesla CEO laid out a case for why the impending arrival of full self-driving technology would justify the company's lofty valuation.

There's just one problem: Musk's entire argument is built upon a fallacy. Let's take a look.

Elon Musk math

Last year, Tesla's automotive revenue reached a record $27.2 billion, and the company earned a GAAP operating profit of $2 billion. Tesla expects to grow dramatically from that base. It projects that it will increase its vehicle deliveries about 50% annually on average in the near term, as it increases its battery and assembly capacity, localizes production, and introduces new models.

Still, based on Tesla's Wednesday closing price of $864.16 and its diluted share count of 1.124 billion shares, the company had a fully diluted market capitalisation of nearly $1 trillion. Even if Tesla was able to grow its earnings tenfold, it wouldn't justify the company's recent valuation without aggressive expectations for continued growth.

During Tesla's recent earnings call, Musk opined that the stock remains reasonably valued if one factors in the profit potential of the full self-driving capabilities Tesla is building.

... [I]f Tesla's ships, let's say, hypothetically, $50 billion or $60 billion worth of vehicles, and those vehicles become full self-driving and can be used ... as robotaxis, the utility increases from an average of 12 hours a week to potentially an average of 60 hours a week. ... [L]et's just assume that the car becomes twice as useful ... that would be a doubling again of the revenue of the company, which is almost entirely gross margin. ... [I]t would be like ... having $50 billion of incremental profit basically from that because it's just software.

In short, Musk argues that FSD capability will make each car Tesla builds dramatically more valuable, because it can be used more than a personal vehicle. Musk believes that Tesla will capture that extra value as almost pure profit, driving a massive earnings inflection that would enable the company to earn tens of billions of dollars annually within a few years -- with plenty of room to keep growing.

It's a giant fallacy

Alas, this "plan" is built on a fallacy. First, while typical car owners may spend just 12 hours per week in their vehicles, actual taxis get used far more often. In New York City, for example, some taxis are used for double shifts and may operate 100 hours per week (or even more). Those vehicles aren't more valuable just because they will be used more: Production costs determine the vehicle's selling price more than intended usage.

Second, Statista estimates that the global market for taxis and ride-hailing will reach $260 billion this year. That represents a sizable opportunity, but getting to $50 billion of revenue or more won't be easy. It will take time for robotaxis to disrupt the traditional ridesharing and taxi markets. And even when they do, Tesla will face lots of competition, as numerous other companies also hope to roll out robotaxi services.

Robotaxi services may earn higher margins than auto manufacturers in the long run. However, Musk's implicit assumption that Tesla could double its revenue with minimal incremental costs -- thus earning pre-tax margins of 50% or more -- is clearly false. If Tesla were to set its robotaxi rates high enough that it could earn such lofty margins, competitors would undercut it on price and steal its market share. This competitive dynamic will sharply limit the incremental profit opportunity from using Teslas as robotaxis.

Look to the core business for Tesla's value

Many Tesla bulls expect the company to become the largest automaker in the world within 10 or 15 years, delivering 10 million or more cars annually. If Tesla can pull that off while attaining double-digit automotive operating margins and building up lucrative side businesses in solar, batteries, and robotaxis, Tesla stock could certainly grow into its valuation over time.

However, investors shouldn't count on robotaxis as a magic bullet that will make Tesla massively profitable overnight. Tesla may develop a nice robotaxi business on the side, but the core auto business' growth will determine whether Tesla stock continues to soar or plunges back to earth in the decade ahead.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla and Twitter. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Tesla Inc (NASDAQ: TSLA) stock has rallied wildly over the past year, gaining more than 700%. Solid growth in vehicle deliveries and margin expansion have both contributed to the stock's surge. Tesla's inclusion in the S&P 500 Index (SP: .INX) index also helped.

Still, these factors can't fully explain Tesla's incredible rise. Tesla stock has doubled just since the middle of November, even though it hasn't reported earnings. It has risen 20% in the first three weeks of 2021, adding about $150 billion to its fully diluted market capitalisation.

Tesla stock performance data by YCharts.

Investor optimism about a "blue sweep" -- Democratic control of the presidency, the Senate, and the House of Representatives -- seems to have provided extra juice to Tesla's rally in recent months. Many investors and pundits expect stronger government support for the electric vehicle industry with Democrats in control. However, the blue sweep could hurt Tesla just as easily as it could help the EV pioneer. Let's take a look.

Democrats take control

President Joe Biden officially took office at noon EST last Wednesday. Newly elected Vice President Kamala Harris swore in new Democratic senators Jon Ossoff, Alex Padilla, and Raphael Warnock later the same day. That officially gave Democrats control of the presidency and the Senate, in addition to the House of Representatives, where they've had a majority since 2019.

Democrats tend to support aggressive efforts to combat climate change, including measures to boost EV sales. Most notably, the 2009 American Recovery and Reinvestment Act created a tax credit worth up to $7,500 for buyers of EVs and plug-in hybrids.

Those credits begin to phase out once an automaker sells 200,000 qualifying EVs or plug-in hybrids in the US. Tesla and General Motors both hit that milestone a couple of years ago, and the credits have phased out entirely for their vehicles. No other automaker has reached the 200,000-unit mark yet, and none are likely to get there until 2022 and beyond. Some investors hope that the government will restore Tesla's eligibility for EV tax credits or help it in other ways now that the Democrats control the presidency and both houses of Congress.

Assessing EV industry stimulus plans

At first glance, these hopes don't seem outlandish. During his campaign and during the transition period, President Biden expressed support for removing the sales cap for the EV tax credit program. Furthermore, most experts agree that tax credits accelerate EV adoption.

However, the Democrats hold razor-thin margins in both the House and the Senate. Biden will need to win the support of moderates to pass legislation. Expanding eligibility for the plug-in EV credit will only benefit Tesla and GM right now. That could make the measure controversial, particularly because Tesla is doing just fine without the credits.

Biden has spent more energy promoting a plan to install 500,000 public EV chargers by 2030. The goal is to support EV adoption by making fast chargers as ubiquitous as gas stations. That proposal stands a much greater chance of being implemented. Senator Joe Manchin of West Virginia -- a key swing vote -- has expressed firm support for infrastructure spending. Moreover, installing all of those chargers could create hundreds of thousands of jobs spread all across the country.

Whereas lifting the cap on the EV tax credit would boost demand for Teslas, a big investment in public charging infrastructure will mainly help its competitors. After all, Tesla drivers already have ample access to fast charging for road trips thanks to the company's Supercharger network. There are fewer fast-charging options for buyers of other automakers' EVs. Thus, Biden's charging station plan could level the playing field by fixing one significant problem for buyers of non-Tesla EVs.

What it all means

Tesla's popularity is growing for many reasons. Customers like its vehicles' styling, performance, and in-car technology, as well as the brand's overall image. The Supercharger network certainly represents a competitive advantage today, but losing that advantage won't cause Tesla's growth to stop.

That said, if the Biden Administration removes charging worries as a barrier to the purchase of non-Tesla EVs, it will help other brands sell significantly more EVs. Over time, that could make those brands seem like legitimate competitors to Tesla in the EV market.

If Tesla stock were still trading at its early 2020 valuation, this wouldn't be a big deal. But with a fully diluted market cap approaching $1 trillion, Tesla is pricing in a level of market share that would be unprecedented. The more help other automakers get in transitioning to EVs, the lower the likelihood of Tesla capturing a 20%-plus share of the global auto market over the next 10 to 15 years (as Elon Musk hopes). That makes the blue sweep potentially bad news for Tesla.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levine-Weinberg owns shares of General Motors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Costco Wholesale (NASDAQ: COST) has been one of the biggest retail winners during the COVID-19 pandemic. Its growth accelerated last quarter, as comparable sales skyrocketed 17.1%, excluding the impacts of currency fluctuations and gasoline price deflation.

For a second consecutive quarter, this double-digit sales growth drove a huge jump in Costco's earnings. The company's accelerating earnings growth suggests that Costco stock still has plenty of upside for long-term investors, despite carrying a lofty valuation after a 27% rally year to date.

Costco Wholesale year-to-date stock performance, data by YCharts.

Margin expansion continues

In the fourth quarter of fiscal 2020 -- the period ending in late August -- Costco posted adjusted comp sales growth of 14.1%. The uptick in sales allowed the company to leverage its normal operating expenses, while higher sales of fresh foods led to higher labor productivity and reduced spoilage. This drove substantial margin expansion, notwithstanding $281 million of incremental wage and cleaning costs related to the pandemic. Operating income jumped 31.9% on a 12.4% increase in total revenue.

Costco's results followed a similar trajectory last quarter. Total revenue increased 16.7% to $43.2 billion. Gross margin improved by approximately 0.5 percentage points, driven primarily by the same tailwinds of higher labor productivity and lower spoilage for fresh foods. Selling, general, and administrative expenses also declined modestly as a percentage of sales.

As a result, operating income surged 34.8% year over year to $1.43 billion, even though Costco incurred another $212 million of pandemic-related premium pay. Adjusted earnings per share reached $2.30, excluding various one-time tax benefits: up from $1.73 a year earlier. On average, analysts had expected adjusted EPS of $2.05.

Are Costco's gains sustainable?

Management has acknowledged that some of Costco's 2020 sales gains may prove temporary. With many restaurants offering limited service (or closed altogether), people are cooking more at home. That's boosting food-related sales at Costco. Meanwhile, high-income shoppers make up a substantial proportion of Costco's customer base. Many of these people have dramatically increased their spending on home-related items, using money they might have otherwise spent on vacations. Lastly, Costco is benefiting from its status as a one-stop shop where people can buy a wide variety of essentials and discretionary items in a single trip.

That said, Costco has cultivated extremely high customer loyalty. Membership renewal rates routinely exceed 90% in the U.S. and Canada (Costco's mature markets). The uptick in sales during the pandemic also appears to be encouraging more customers to upgrade to Costco's executive membership, which costs twice as much but offers 2% cash back on most purchases.

Thus, the retail giant has a good chance to retain many of the new members who have signed up this year, while the 2% cash reward will encourage newly minted executive members to shift more spending to Costco over time. Looking ahead, Costco will also benefit from an eventual revival in its hard-hit ancillary businesses, including its food courts, gas stations, and travel business. The March acquisition of logistics company Innovel Solutions should also help Costco increase its sales of big-ticket items in the years ahead.

A terrific business worth its premium valuation

Despite the strong Q1 results, Costco stock has barely budged since the earnings report. It now trades for a little more than 37 times Costco's projected fiscal 2021 earnings. That's certainly pricey: The S&P 500 as a whole is valued at 26 times forward earnings.

However, the 2021 analyst consensus implies EPS growth of just 11% for the rest of fiscal 2021. That seems extremely conservative in light of Costco's recent earnings trend. Furthermore, Costco's industry-leading prices should help it continue to gain market share for many years, driving strong sales growth. And with a pre-tax margin of just 1.2% excluding membership fee income last year, even modest margin improvements over time could turbocharge Costco's earnings growth.

Costco stock may not be a bargain anymore. But considering the company's massive long-term growth opportunities, it still holds plenty of potential for patient investors.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Costco Wholesale. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The COVID-19 pandemic has devastated many businesses around the world. However, it has been a huge positive catalyst for Shopify (NYSE: SHOP). The pandemic forced retailers – including many mom-and-pop stores – to shift their focus to e-commerce. Shopify helped these businesses set up online stores so that they could continue generating revenue, even with little or no traffic to their physical stores.

Shopify stock has responded accordingly. The stock had already surged more than 1,400% between 2016 and 2019, but it has rallied another 166% in 2020. Despite a recent pullback, Shopify stock sits within 10% of its all-time high of $1,146.91.

Data source: YCharts.

The pandemic-fuelled rally in Shopify stock isn't likely to last, though. Shopify bulls appear to be overestimating the company's long-term growth and earnings prospects.

Two conflicting megatrends

One of the biggest megatrends of the century is the transition of much of retail to e-commerce. That transition is still in the early innings. Last quarter, e-commerce accounted for just 14% of U.S. retail sales. It's not clear what the long-term balance between brick-and-mortar retail and e-commerce will be, but it will clearly involve more e-commerce than today. Shopify will benefit from this megatrend for many years to come.

However, a cross-cutting megatrend is far more troublesome for Shopify: the growing concentration of the retail industry. The top 10 U.S. retailers are on track to ring up at least $1.5 trillion of gross merchandise volume (GMV) this year. (The total GMV of all retailers with over $10 billion of domestic sales will easily exceed $2 trillion.) For comparison, U.S. retail sales will likely wind up near $4 trillion this year, excluding auto and gasoline sales.

Amazon.com (NASDAQ: AMZN) is virtually certain to increase its already-high market share significantly over the next decade. Investors are also pricing shares of big-box retail giants like Walmart, Target, Costco Wholesale, and even Best Buy for significant future growth. Based on their low costs, broad store networks, and omnichannel offerings, it seems like a good bet that this expected growth will pan out.

A lot of Shopify's 2020 growth has come from helping smaller merchants make the transition to e-commerce. The risk is that in many cases, this may be a last-ditch attempt to stay in business – one that ultimately fails as Amazon and other megaretailers continue steamrolling less efficient competitors.

Shopify does offer tools to help merchants on its platform sell through Amazon as well. In theory, that means Shopify could participate partially in Amazon's rapid GMV growth. However, as Amazon becomes increasingly dominant in the U.S. retail landscape, merchants may find that virtually all of their sales come from that channel, reducing the value of Shopify's services.

Massive multiple contraction is inevitable

Shopify has reported incredible results in 2020. Last quarter, revenue surged 96% on a 109% increase in GMV. That helped Shopify swing to a profit after losing money in the prior-year period. Revenue is on track to reach nearly $3 billion this year, and analysts expect Shopify to add almost $1 billion to its top line in 2021. Jefferies analyst Samad Samana thinks revenue could surge to $10 billion by 2025. Yet even if Shopify lives up to that aggressive forecast, it might not lift Shopify stock.

Right now, Shopify stock trades for an eye-popping 45 times projected 2020 sales. That might make sense for an ultra-high-growth software company. However, lower-margin merchant solutions are driving the bulk of Shopify's growth. Last quarter, subscription solutions revenue grew 48%, compared to a 132% surge in merchant solutions revenue. Subscription solutions carried a gross margin of 78.7%, compared to 40.6% for merchant solutions.

Shopify's investments in areas like robotics and fulfillment make sense. But as lower-margin revenue streams become an even bigger proportion of the business, Shopify's revenue multiple is likely to shrink significantly. Later on, as the business matures and growth slows, its multiple is bound to contract even further.

Shopify stock has flown too high

When Shopify finally reaches maturity, many years down the road, it will probably merit a modest revenue multiple of around three times sales. (Oracle – a mature software company with extremely high margins – trades for less than five times sales.) Even if Shopify were to grow revenue at a 20% compound annual growth rate over the next two decades to around $100 billion by 2040, the company's market cap would be just $300 billion at that valuation: only 135% above its current level.

Moreover, I suspect that Shopify's long-term revenue opportunity is even lower. Over the next decade, the percentage of retail sales going to massive corporations with over $10 billion of annual sales will continue rising. Unless Shopify can convince some of the largest retailers in the world to adopt its platform, it is ultimately playing in a shrinking market: one that isn't big enough to justify Shopify stock's lofty valuation.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and Shopify and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Boeing (NYSE: BA) issued its annual forecast for the commercial jet market in October. Not surprisingly, the aerospace giant reduced its estimate for global aircraft deliveries over the next 20 years – and especially for the current decade – relative to its 2019 outlook.

Despite slashing its long-term forecast, Boeing still may be overestimating the level of aircraft demand between 2020 and 2029. However, the scariest thing in its updated outlook is that even if its demand forecast is accurate, Boeing has virtually no path to getting back to pre-pandemic production levels during the current decade.

What the forecast says

Boeing estimates that manufacturers will deliver 18,350 new aircraft between 2020 and 2029, including 1,240 regional jets: a market segment that Boeing and Airbus (OTC: EADSY) don't participate in. That puts the estimated addressable market for Boeing and its chief rival at 17,110 aircraft over the 10-year forecast period.

Unsurprisingly, Boeing expects single-aisle mainline jets (like the Boeing 737 MAX) to continue to account for the vast majority of demand, with 13,570 deliveries between 2020 and 2029. Wide-body passenger jets and freighters represent the other 3,540 projected deliveries.

Most of these deliveries are spoken for

The scary thing for Boeing is that most of these projected deliveries have already been sold – and mostly not by Boeing. This is particularly true for narrow-bodies: the high-volume segment of the market.

In the first 10 months of 2020, Airbus delivered 355 single-aisle jets. It ended October with an enormous backlog of 6,517 unfilled narrow-body orders across its A220 and A320 families. Airbus' 2020 deliveries and current firm orders account for 51% of what Boeing projects will be delivered over the entire decade in the single-aisle market. Meanwhile, due to the 737 MAX grounding, Boeing has only delivered 13 narrow-bodies year to date (mainly military variants). Its backlog for the 737 family – its only entry in the single-aisle market – totals 3,365 orders.

Furthermore, while Boeing and Airbus dominate the commercial jet market, they aren't the only players. Russia's Irkut had 175 firm orders for its MC-21 jet as of September. Meanwhile, China's COMAC claims to have 815 orders for its C919 jet, although only around 300 of those appear to be firm orders. Both new models had their first flights in May 2017, and both manufacturers expect to begin deliveries in late 2021, although it's certainly possible that the timeline will slip to 2022.

In short, more than 10,700 single-aisle jets have been delivered in 2020 or are on firm order today. The 737 MAX accounts for less than a third of that figure. Meanwhile, fewer than 3,000 additional single-aisle jets would need to be ordered to meet the market's projected demand through 2029.

Unless Boeing secures the lion's share of those orders – which would mark a big turnaround from recent history – it is virtually locked into its current position as a distant No. 2 in the most important part of the commercial jet market.

To be fair, Boeing is in better shape for wide-bodies, where it still has leading market share. It has delivered 98 wide-bodies this year – including passenger, freighter, and military variants – compared to just 58 deliveries for Airbus. Boeing ended October with 910 outstanding firm wide-body orders, versus Airbus' 860. However, wide-bodies (including freighters) will account for just 20% of aircraft deliveries this decade, according to Boeing's forecast. Moreover, that projection could still be too generous.

A new normal for Boeing

In 2018, Boeing delivered 806 commercial jets: 580 737s and 226 wide-bodies. Meanwhile, Airbus delivered 800 jets: 646 narrow-bodies and 154 wide-bodies.

Airbus' current narrow-body backlog equates to an average of more than 700 annual deliveries between 2021 and 2029: more than what it delivered in 2018. Boeing's current backlog wouldn't even support an average of 400 annual 737 deliveries. Since there are potentially fewer than 3,000 additional orders up for grabs for narrow-body deliveries this decade, the aircraft manufacturer would need to capture a disproportionate share of that business to get back to building nearly 600 737s annually.

Getting even 50% of the incremental order volume could be challenging. Airbus' A220 is smaller than the smallest 737 MAX model, giving it lower trip costs, while the A321XLR has significantly more range than any 737 MAX. Thus, Airbus addresses market segments that Boeing doesn't participate in today. Additionally, Irkut and COMAC are virtually guaranteed to capture additional orders because of their status as national champions. COMAC in particular is poised to tap into the enormous Chinese airline market.

As for wide-bodies, even if Boeing's forecast is accurate and it maintains a modest market share advantage, annual deliveries would remain firmly below its 2018 tally. Barring some unexpected event that causes a rapid shift in the market share landscape, Boeing will struggle to make a full recovery from the double-whammy of the 737 MAX grounding and COVID-19 pandemic.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Tesla Inc (NASDAQ: TSLA) has set its sights on building an affordable car with a $25,000 starting price -- again. At the company's Battery Day last month, Tesla announced a slew of innovations designed to reduce battery production costs by up to 56% while also increasing range and power. As my Foolish colleague noted at the time, a new "tabless" cell design was the biggest breakthrough, but Tesla also discussed changes to the cells' form factor, battery chemistry, and manufacturing process, among other things.

Working to bring down prices is the right strategic focus for Tesla. However, its stated goal of offering a $25,000 car within three years seems far-fetched. Additionally, with better, cheaper batteries on the way, it will be increasingly difficult for Tesla to meet its volume growth goals over the next few years.

Can it be done profitably?

There are two facets to the first major challenge Tesla faces. The first relates to whether it will be able to reduce costs enough to earn a reasonable profit on a $25,000 car. After all, when Tesla ramped up deliveries of the cheaper (sub-$40,000) Model 3 variants last spring, its gross margin plunged to 18.9% in Q2 2019 -- and closer to 17% excluding regulatory credits -- down from around 25% in the second half of 2018. It quickly made the $35,000 standard-range Model 3 an "off-menu" option to push buyers to pricier versions that it could produce profitably.

The cheapest version of the Model 3 available on Tesla's website is the "standard range plus" option, which has a starting price of $37,990. This variant has a 54-kWh battery. Third-party sources have put Tesla's 2019 battery costs between $127 per kWh and $158 per kWh. Even at the high end of that range, the battery for a standard range plus Tesla 3 would cost less than $9,000.

Thus, even if Tesla succeeds in all of its cost-reduction objectives related to batteries, the savings might be on the order of $5,000. That alone wouldn't get Tesla close to being able to make a $25,000 car profitably.

The second issue relates to timing. Tesla did not bring a prototype of its new battery design to the Battery Day event. This raises questions about how far along it is in the development process, which requires solving some tricky problems. Moreover, Musk has frequently talked about how difficult it is to scale up manufacturing of new technologies, relative to just building a prototype.

This makes it unlikely that a $25,000 vehicle could be available in as little as three years. Another reason to take this projection with a grain of salt? CEO Elon Musk said more than two years ago that a $25,000 Tesla could come to market in about three years (i.e. 2021). That obviously isn't happening.

Getting from here to there

Another big challenge for Tesla is driving sales of its current products before the new battery technology becomes available. Musk has previously talked about targeting 50% annual growth in vehicle deliveries. At that pace, Tesla would deliver over 1.2 million vehicles in 2022 and more than 1.8 million vehicles in 2023.

Achieving that level of growth would be difficult under any circumstances. It requires moving well beyond the early adopters and enthusiasts. Additionally, there appears to be only one high-volume product on the way to help Tesla reach these numbers (the Cybertruck).

This task will be complicated if people believe that Tesla will soon have vehicles on the market offering 50% or more additional range at significantly lower prices. Whereas early Model 3 buyers have seen their cars depreciate very little over the past few years, future buyers won't be so lucky if Tesla puts new products that are better and cheaper on the market by 2025.

Of course, this isn't to say that Tesla shouldn't pursue advancements that will eventually reduce battery costs and improve performance. It is much better to disrupt your existing products than to wait for a competitor to do so. But investors shouldn't ignore the impact of this coming disruption to Tesla's products and pricing, either.

Tesla is on the right track

All in all, Tesla's Battery Day presentation showed that the company is focused on the right goal: driving down costs to make its vehicles more affordable. Tesla wouldn't be able to meet its long-term growth goals or fulfill its mission "to accelerate the world's transition to sustainable energy" with its current product portfolio.

Furthermore, while Tesla has plenty of work to do to achieve the specific target of a $25,000 car, it has a more credible game plan for reducing costs than it did when Musk talked about this goal back in 2018.

However, while Tesla appears to be on the right track, it's not clear how far down the track -- and thus, how far ahead of competitors -- the electric vehicle pioneer is right now. As a result, I would be wary of investing in Tesla at its premium valuation of more than $400 billion.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Shares of Tesla (NASDAQ: TSLA) roughly doubled in the first four months of 2020, despite a brief dip during the peak of the COVID-19 pandemic. This left Tesla stock trading near $800 at the end of April.

Elon Musk was skeptical of the rally, though. On May 1, the outspoken Tesla CEO tweeted, "Tesla stock price is too high imo [in my opinion]," causing the stock to plunge 10% that day. However, he didn't dent investors' enthusiasm for very long. Tesla stock resumed its rally in June and surged higher in July, briefly reaching an all-time high of $1,794,99 on July 13. While the share price has receded a bit since then, Tesla shares have still nearly doubled since Musk's tweet that the stock price was too high.

Data source: YCharts.

In the short run, Musk's assessment of Tesla stock appears to have been wrong. Nevertheless, he was right that growth-hungry investors have driven the stock to a level that can't be justified by the company's long-term earnings prospects.

Profitability has been subpar

Tesla's management has touted lofty margin goals over the years. On the company's recent earnings call, CFO Zach Kirkhorn mentioned a medium-term target of "low-teens" operating margins, with additional upside beyond that level. Just getting to 10% would put Tesla near the front of the pack in the global auto industry.

So far, though, Tesla's profitability remains mediocre. Last quarter, the electric vehicle pioneer reported operating income of $327 million, putting its operating margin just above 5%. Pre-tax income was just $150 million. Moreover, Tesla benefited from regulatory credit revenue nearly quadrupling year over year to $428 million. This revenue stream isn't sustainable in the long run: As other automakers ramp up electric vehicle production, excess credits will become far less valuable.

To be fair, Tesla was hampered by production disruptions due to COVID-19 last quarter. If we look back to the final quarter of 2019, operating income was $359 million and pre-tax income was $174 million, with a more modest $133 million contribution from regulatory revenue. These are extremely skimpy profits for a company with a market capitalization well above $250 billion.

Tesla lacks a mass-market strategy

As Tesla expands production -- it opened a new factory in Shanghai late last year and hopes to bring new plants in Berlin and Austin on line by late 2021 -- its profit margin should improve due to economies of scale. However, economies of scale alone aren't likely to boost Tesla's operating margin into double-digit territory (unless regulatory credit revenue unexpectedly continues surging).

The biggest impediment to margin expansion is Tesla's need to cut prices. Despite rolling out lower-priced variants of the Model 3 sedan and an affordable crossover (the Model Y), Tesla's average selling price has remained close to $60,000. High prices are good for gross margin, all else equal, but they aren't consistent with Tesla's goal to become a mass-market automaker selling millions and millions of cars annually. There are only so many people willing to pay that much for a vehicle.

Tesla has periodically cut its prices to make its vehicles slightly more affordable. Just a few weeks ago, it lowered Model Y prices by $3,000. Tesla's inability (or unwillingness) to develop a truly affordable car that can be produced cheaply means that it will have to continue reducing the prices of its existing models over time, offsetting some of the margin improvement that would otherwise come from gaining scale.

Don't count on software to save the day

With Tesla still struggling to achieve meaningful profits relative to its valuation, investors and management have turned to ever more speculative means of justifying its soaring stock price. For example, Piper Sandler analysts recently boosted their Tesla price target to $2,322, arguing that Tesla's operating margin could surpass 20% over the next two decades while selling cars near breakeven. The catch? Tesla would need to convince a substantial number of customers to pay close to $40,000 for a full self-driving software package.

The Piper Sandler analysis is conservative compared to Elon Musk's predictions that full self-driving capability could increase the value of each Tesla vehicle by "at least $100,000 per car."

Count me as extremely skeptical. One of Tesla's main selling points has been high performance. There's not much point to buying a performance car if you're going to have it on Autopilot all the time. And while Tesla owners may be able to make money by allowing their vehicle to operate in a future Tesla ride-hailing network when it would otherwise be idle, competition will sharply limit the revenue opportunity. Moreover, many people spending $50,000 or more on a car will be reluctant to turn it into a taxi.

Tesla is a great company that is driving a long-overdue transition to sustainable personal transportation. However, it has a higher market cap than any other automaker in the world despite its small size and low margins. Until the stock price comes down substantially, investors should stay away.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.