Electric vehicles and autonomous driving are the key forces transforming the auto industry today. As a pioneer in these technologies, Tesla (TSLA 4.67%) seems well placed to threaten the decades-long dominance of top legacy automakers.
After Tesla posted massive sales growth and positive net income for seven quarters in a row, the company seemed to have mastered the art of business in addition to technology. The stock skyrocketed 20 times from around $40 to $883 in under two years. Investors who didn't get in early were disappointed after missing the rally.
But with Tesla stock having fallen 33% off its 2021 high, has their chance finally come? Let's analyze whether the latest dip offers an attractive entry point into this popular stock.
Why is Tesla stock falling?
The recent fall in Tesla stock can be attributed to a combination of factors. To begin with, its performance in the latest quarter failed to impress investors. Though the company's Q1 revenue grew over the year-ago quarter, it fell sequentially. Tesla attributed the fall to a lower average selling price of its units. Notably, the company still increased its gross margin, as its production costs per unit also fell.
Another concern was that the bulk of Tesla's profits didn't come from its core car selling business but from regulatory credits -- which Tesla sells to other automakers, which can use them to avoid penalties under certain emissions standards. Tesla also faced some supply chain challenges, which may persist in the coming quarters.
Meanwhile, Tesla's Berlin factory's opening was delayed by at least six months due to permitting issues. In China the company is facing increasing competition from local companies, resulting in lower vehicle sales in April. China is a key market for Tesla, accounting for nearly 30% of its Q1 sales.
Finally, a car crash last month involving a Tesla car has raised concerns regarding the safety of the company's self-driving features. The California Department of Motor Vehicles is investigating whether Tesla's FSD (full self-driving) feature is misleading consumers.
All in all, Tesla is grappling with numerous problems. With the lofty price-to-sales ratio of around 30 that the stock had back in January, the string of problems obviously concerned investors, resulting in a steady fall in the stock's price.
The future is EVs and autonomous driving
All of this may look daunting, but competition, delay in factory constructions, and supply problems are not uncommon for a fast-growing auto company. Tesla has proved that it can successfully navigate such hurdles in the past. The company continues to focus on improving its battery range, expanding manufacturing facilities globally, and developing FSD features.
The recent fall in Tesla stock, partly due to operational issues, has pushed its valuation to a more attractive level. Its price-to-sales ratio has improved to around 18 from 30 in January due to a combination of sales growth and a fall in the stock's price. Considering that the company's sales grew at an average rate of 50% in the last five years and it expects deliveries to rise at that rate annually, the ratio looks very reasonable.
Though its valuation still looks high when compared to that of other auto stocks, such a comparison ignores Tesla's massive potential in the autonomous driving segment. Based on autopilot miles data collected, the company could already be many years ahead of its competition in this key segment that looks set to disrupt driving as we know it today. Although even Tesla is far from full autonomous driving, the company is already offering its current FSD feature as a separately chargeable upgrade.
Tech companies and conventional automakers could challenge Tesla in autonomous driving in the future. But Tesla's vertical integration should work better in the long run compared to any collaboration between a tech company and an automaker. So Tesla looks well placed to benefit from its progress in EVs and full self-driving. As it offers an improved autonomous driving experience, people's craze for Tesla, and its stock, should only rise higher.