Tesla (TSLA 4.72%) and its CEO Elon Musk are no strangers to the spotlight. But when Tesla makes headlines for meaningful business accomplishments, the auto industry can't help but sit back in awe.
Tesla produced and sold over 930,000 electric vehicles (EVs) in 2021, which is around half as many vehicles as Ford (F 6.24%) sold in total in 2021. It's an incredible achievement considering Tesla delivered less than 250,000 vehicles in 2018.Let's dive into Tesla's performance and uncover reasons why the stock may or may not be a good buy now.
Valuation still matters
Howard Smith: Early Tesla investors were right that the Musk-led EV trailblazer would become wildly successful. It took some time, but Tesla reported earnings of $1.6 billion in the third quarter of 2021, and its record fourth-quarter vehicle delivery data bodes well. The company's success, along with the prospects for a fast-growing EV market, has investors valuing the company at lofty multiples.
In early 2017, when Tesla was only producing EVs at a pace of about 100,000 per year, investors had already given the company a $35 billion market cap. Fast forward five years and the company is now worth more than $1 trillion. Even when Tesla grows to earn $10 billion per year, its price-to-earnings ratio would be 100 at its recent share price. That's a high multiple when that level of earnings is still seemingly years away.
Tesla will still need to ramp up its two newest factories when they begin production in Texas and Germany. A recent recall announcement that involved several years' worth of Model 3 production shows the company still has to continue improving. And the newer factories will go through similar growing pains.
That's not to say that it won't push through those hurdles. And with EV demand far outweighing supply, there's no reason to doubt Tesla's long-term success looking ahead. But that doesn't mean the stock price hasn't gotten ahead of itself. Investors may very well get a chance to invest in Tesla at much better valuation levels than where it sits today.
From sole investment option to a role player
Daniel Foelber: Share prices of Tesla have had a torrid run the last two years, making it easy to forget the turmoil that the company was in not long ago. Let's go back in time to May 29, 2019. Tesla's stock reached a multi-year intraday low of a split-adjusted $37.01 per share. Since then, the stock has proceeded to gain more than 2,800% in less than three years. Keep in mind that Tesla was a well-known automaker when its shares sold off in 2019 -- meaning you weren't an early investor by any means if you were buying Tesla stock then.
Tesla stock was getting crushed in spring 2019 because the company was struggling to post consistent back-to-back profitable quarters, was overpromising and underdelivering on the production side of things, and basically had yet to establish itself as an automaker that could achieve both consistent growth, and run an efficient business. The last three years have seen Tesla grow into and arguably past the valuation that many hoped it would reach. The Tesla of today is an incredibly profitable company that is also growing quickly.
Tesla's record Q4 2021 and full-year figures are a testament to strong demand for EVs in China, Europe, and North America. The question for many isn't if Tesla is a good company or not, but if it's worth $1 trillion. As Tesla has grown and matured over the last three years, so too has the global industry ramped its commitment to EVs. The current EV landscape includes many newcomers like Lucid and Rivian or legacy automakers like Ford that are investing aggressively in EVs. Therefore, other companies deserve to be mentioned in the EV conversation aside from Tesla.
That being said, ruling Tesla out is probably the wrong move for investors looking to gain upside exposure in the EV space. But betting that Tesla will continue to grow without a threat could prove to be naïve. Given Tesla is the industry leader, a balanced option could be to simply include Tesla in a basket of other EV stocks. The transition from the internal combustion engine to the electric motor is still in the early innings. Therefore, Tesla and its EV competitors stand to succeed as they take market share from legacy automakers. In a market that is unlikely to be winner-take-all, Tesla should keep on growing for decades to come.
Be patient with Tesla
Tesla could remain a battleground stock as investors grapple with an unprecedented valuation for a company that is still relatively new to the auto industry. Yet Tesla bulls would argue that there's no stopping the transition toward the electric motor. In a world where passenger vehicles are increasingly EVs, it's hard not to see Tesla as the global leader in the future. At the same time, the stock is likely to remain volatile, and that could provide a better entry-level point for investors looking for a cheaper price.