Over the past year, retail investors have made their presence known on Wall Street like never before. Online trading platforms like Robin Hood (HOOD 1.99%), especially popular with retailers, rolled out the red carpet for regular investors to put their money to work on Wall Street. When this happened, retail shook the boat, sending a number of heavily shorted stocks higher.
Robinhood offers commission-free trading on major US exchanges, allows customers to purchase fractional shares, and gives away free shares (randomly chosen) to new members.
Apple has been the top holding for Robinhood investors for quite some time
Though Robinhood’s retail loyalists have shown a love of chasing momentum plays, penny stocks, and heavily shorted companies, there has been one consistency: tech kingpin Apple (AAPL -1.00%) was regularly the most-held stock on the platform.
There’s no shortage of reasons investors love Apple. First of all, it is by far one of the most recognizable brands in the world. In fact, a Brand Finance report has named Apple the world’s most valuable brand for consecutive years. The report cited Apple’s diversification on the product front, its subscription-driven push and “strengthening its privacy and environmental credentials” as reasons it takes the top spot again.
Apple’s innovation was also a key driver of the stock price’s outperformance. For example, Apple’s launch of a 5G-enabled iPhone in the fourth quarter of 2020 boosted its share of the US smartphone market. Since the release of 5G iPhones, Apple’s domestic smartphone share has fallen below 50% in just one quarter.
But this innovation isn’t just seen in the company’s successful product line. CEO Tim Cook oversees Apple’s ongoing transition into a services-based company. By promoting subscription services, Apple has an opportunity to further strengthen its already impressive brand loyalty and increase its long-term operating margins. Perhaps most importantly, as subscription sales account for a larger percentage of net sales, the sales volatility that often occurs with product replacement cycles should decrease.
Apple’s capital return program also gives investors more than enough incentive to buy. Since initiating a stock repurchase program in 2013, Apple has repurchased approximately $520 billion worth of common stock. What’s more, it pays out more than $14 billion in annual dividends to its shareholders every year.
Move, Apple! There’s a new #1 in town
However, change is a fundamental part of Wall Street; and there was a big change in the Robinhood ranking (the list of the 100 most-held stocks on the platform). Electric vehicle (EV) manufacturers from early August 2022. Tesla (TSLA -0.63%) had dethroned Apple as Robinhood’s most-held stock.
Before I dive into the fundamentals behind retail investor love for Tesla, I’d be remiss if I didn’t point out that shares have soared more than 1,800% over the past three years and over 17,100% in recent years Decade. Robinhood investors love momentum stocks, and Tesla has certainly shown that it fits the definition.
Another reason investors are excited about Tesla is the company’s success in building itself from the ground up. While other automakers have attempted a ground-up approach, Tesla was the first to achieve and sustain mass production in more than five decades. Despite the semiconductor chip shortage and parts challenges posed by the COVID-19 pandemic, Tesla appears to be on track to hit 1 million vehicles by 2022.
Tesla has also made decisive advances in the profit pillar. In each of the last five quarters, Tesla has generated between $1.14 billion and $3.32 billion in GAAP earnings. This appears to have further allayed concerns about the company’s long-term viability.
And let’s face it, individual investors are big fans of CEO Elon Musk. The outspoken CEO has promised a number of innovative technologies are on the way, including more fully self-driving and Tesla Bot, a robotic humanoid currently being developed by the company. Musk also owns tokens of the popular cryptocurrency Dogecoins and has started accepting DOGE coins for a small handful of Tesla merchandise.
Robinhood investors could be heading for a meltdown
Upon closer inspection, there are many reasons for investors to be excited about the electric vehicle industry and its long-term growth. But when that lens focuses solely on Tesla and its $942 billion market cap, a number of red flags emerge.
For starters, Tesla’s valuation has exploded on the premise that its competitive advantages are sustainable. While it has a sizable lead in terms of battery capacity, range and performance, we’re already seeing a number of new and older automakers catching up on range.
For example, no,’s recently introduced sedans, the ET7 and ET5, have battery upgrades that buyers can purchase that increase their range to 621 miles, the company says. That’s far better than Tesla’s affordable Model 3 and premium Model S. In other words, the deep pockets of legacy auto companies and the innovative power of new auto companies like Nio could quickly erode Tesla’s “competitive advantage.”
While Elon Musk is a big reason private investors bought Tesla, he might as well be the number one reason investors avoid Tesla like the plague. That’s because Musk has a habit of over-promising and under-delivering on projects. Remember the conceptual all-electric Tesla Semi unveiled in late 2017? The first production model is not expected until 2023. Remember when Elon Musk promised to have 1 million robotic taxis on the roads with no steering wheel or pedals by the end of 2020? That promise has been pushed back to 2024. That’s not to say Musk doesn’t end up delivering what he set out to do. Rather, it shows that Tesla’s CEO is rarely ever able to deliver on his promises in a timely manner.
Tesla’s income statements are another reason to pause. Though auto gross margin had improved through the most recent quarter, Tesla has still relied on selling regulatory credit to other automakers to boost its profits. With the ongoing semiconductor chip shortage, rising inflation, and COVID-19 lockdowns in provincial China adversely affecting the Shanghai Gigafactory, it’s not clear how Tesla will increase its auto gross margin going forward.
In an industry where single-digit annual price-to-earnings (P/E) ratios are the norm, Tesla stands out with a P/E of 57.