Tesla (NASDAQ: TSLA) is the undisputed leader in the electric vehicle (EV) space. With Elon Musk at the helm, TSLA stock has returned a staggering 16,800% to shareholders since its initial public offering. Currently valued at a market cap of US$855 billion, Tesla stock is trading 34% below all-time highs.
Let’s see if it makes sense to scoop up Tesla shares at its current valuation.
The bull case for Tesla stock
Due to its early-mover advantage, Tesla now enjoys a wide economic moat in the EV segment. The company has increased sales from US$413 million in 2012 to US$81.46 billion in 2022, indicating an annual growth rate of 69%. The company is now forecast to end 2023 with sales of US$100 billion.
The EV manufacturer pleasantly surprised investors earlier this week after it reported better-than-expected vehicle deliveries in the second quarter (Q2) of 2023, showcasing the company’s resiliency amid a rough macroeconomic environment.
Tesla confirmed it delivered 466,160 units in Q2, an increase of 83% year over year. The EV giant had earlier emphasized it targets to grow vehicle deliveries by 50% annually, and in the last four quarters, vehicle deliveries are up 47% year over year. Comparatively, analysts forecast Tesla’s deliveries at 466,000 units in the June quarter.
Its stock prices expectedly surged higher following its robust delivery numbers for Q2, and TSLA has now more than doubled in 2023.
Tesla is now an auto giant, given how the company has successfully expanded its manufacturing capabilities at a rapid pace. For instance, Tesla delivered around 20,000 vehicles in 2013. In the last 10 years, it has built factories in China, Germany, and the U.S., allowing it to drive volumes much higher.
This expansion has translated towards significant profits. The company reported a net loss of US$775 million in 2019 and ended 2020 with a net income of US$690 million in 2020. Its net margin has expanded in the last two years and touched 15.4% in 2022.
The bear case for TSLA stock
While Tesla has delivered outsized gains to shareholders, investors are worried about its narrowing margins. An increase in interest rates and higher inflation have reduced consumer demand in the last 18 months. In order to combat the higher cost of debt, Tesla reduced prices for some models by 20% in early 2023.
With higher interest rates, demand for Tesla’s EVs might remain subdued, despite price cuts. Tesla will be forced to reduce prices further if demand trends are tepid in the next 12 months.
The price cuts resulted in Tesla’s net income falling by 24% year over year in Q1 of 2023. Analysts now expect adjusted earnings per share to decline by 14% to US$3.5 per share in 2023. So, Tesla stock is priced at 77 times forward earnings, which is quite steep.
In addition to falling profit margins, Tesla is wrestling with competition from new and legacy automobile manufacturers. In the last two years, companies such as Lucid Motors and Nio have been looking to increase market share, while established companies, including Ford and General Motors, are also rolling out EVs.
Due to its steep valuation, analysts remain cautious about Tesla stock. Wall Street expects shares to fall by 22% in the next 12 months. However, for long-term investors, Tesla remains a promising investment.
