Tesla (TSLA -3.55%) stock was up more than 10% year-to-date when it released better-than-expected Q4 and full-year production and delivery numbers in early January. Now, the electric car stock is down nearly 20% YTD after reporting Q4 and full-year earnings after market close on Wednesday.
Here's the bull and bear case for buying Tesla stock now.
Image source: Tesla.
An industry leader that shows no signs of slowing down
Daniel Foelber: Industry-leading companies can see their share prices fall after excellent earnings reports for several factors within and outside their control. For starters, investors can drive up the stock price leading into earnings. In this case, Tesla's stock price, along with the broader market, were falling in the days leading up to the report. Another reason for a post-earnings decline could be weak guidance, which we'll get to in a second. But the most concerning reason, and something we've been seeing with a lot of top companies so far this earnings season, is when Wall Street begins reevaluating a company.
Known as a "multiple contraction" -- stock prices can tumble if investors are less willing to pay a premium price for a stock relative to its sales or earnings. The opposite of a multiple contraction, known as a "multiple expansion," helped the S&P 500 double between 2019 and the end of 2021.
The issue with a raging bull market is that it can get derailed in a hurry if the macro factors change. And with the Federal Reserve raising interest rates in March and likely three or four times this year, debt will become more expensive -- which hurts growth stocks. Inflation dilutes the purchasing power of a dollar, which is a problem for unprofitable companies that are valued on future earnings. These headwinds, paired with ongoing supply chain concerns, a tight labor market, and a U.S. stock market that may have gotten ahead of itself are all reasons for a correction.
Yet Tesla isn't the debt-dependent company it used to be. It is now consistently profitable and free cash flow positive, meaning that its business generates more cash than it needs to run its operations. This dynamic is a stark contrast to the "production hell" days when Tesla was diluting its stock or borrowing money to make ends meet. In fact, Tesla ended 2021 with debt of just $1.4 billion after paying down $1.5 billion in debt.
Tesla has one of the highest operating margins in the auto industry, expects production volume to increase by 50% in 2022 compared to 2021, and is on track to grow its global manufacturing footprint once it opens factories in Germany and Texas. It's worth mentioning that Tesla believes the 50% production growth goal is possible using capacity solely from its California and China factories.
Tesla cited ongoing supply chain constraints as an issue that could impact its performance in 2022. Along with broader market headwinds, it wouldn't be surprising to see Tesla stock continue to be volatile and fall further from here. But the long-term thesis for Telsa is brighter than ever. Tesla is a polished company with a leading position in the electric vehicle (EV) industry. There are plenty of other attractive buys in the EV space, but Tesla remains a worthy addition to a diversified basket of EV stocks.
There's still a lot of wishful thinking in Tesla's valuation
John Rosevear: Bulls were excited about Tesla's fourth-quarter results. The company beat Wall Street's expectations for revenue and earnings per share. Specifically, its operating margins looked good, as you'd expect from a company that gets luxury-car pricing, doesn't have to pay franchised dealers, and operates in market segments where the competition is still thin.
That's all good. After years of losses, Tesla now has the scale and pricing power to deliver profits. Nicely done, Mr. Musk.
But none of that is what drove Tesla to a $1 trillion valuation last year, and it's not what is supporting the company's current valuation, around $835 billion as I write this on Friday.
What drove Tesla to those still-insane valuations is the story.
As fans tell it, Tesla is a no-brainer to be the world's largest automaker in a few years, powered by massive demand for its cars thanks to technology that nobody can match. Tesla will max out all the factories it can build, it will deliver "Full Self Driving" years ahead of rivals, and — countering 120 years of automotive history — its vehicles will actually appreciate in value thanks to that amazing tech.
My problem with that story is that it's nonsense.
My fundamental objection to the Tesla bull case, the one that underlies everything else I've said about the company for a decade, is this: The extreme enthusiasm that fans have for the company is the hallmark of a niche brand, not a mass-market automaker. If that kind of cultish enthusiasm translated into sales, Jeep would be selling 20 million vehicles a year. (It's not, it never will, and neither will Tesla.)
What Tesla fans don't seem to grasp is that most consumers don't want whiz-bang vehicles stuffed with move-fast-and-break-things tech that only works if you know all the inside secrets. Most customers, generally speaking, want vehicles like Toyota RAV4s and Volkswagen Golfs — vehicles that are dependable, simple to operate, and that will reliably get them to work every morning.
That's why Toyota and VW sell roughly 10 million vehicles a year, year after year. But Tesla isn't that kind of automaker and it's not ever going to be that kind of automaker, at least as long as Elon Musk is leading it.
Demand for the Model Y is carrying Tesla at the moment. But as Ford's Mustang Mach-E has already shown, the big automakers are perfectly capable of matching its tech while beating it on quality -- and many more big automakers will launch Tesla rivals over the next couple of years. What then? Image source: Tesla.
After pondering this for years, I now think that Tesla's growth will max out somewhere between 2 million and 3 million vehicles a year. I might be off by a bit in either direction, but it won't be anywhere near the 20 million annual sales that bulls seem to think is inevitable (and that has been baked into Tesla's valuation for a few years now).
Three million Teslas a year would be a nice business, a good and profitable business. It would be a BMW-sized business, roughly, a business that Tesla's fans and all Americans could be proud of.
But it's not a trillion-dollar business. Not even close.
And as for "Full Self Driving," Elon Musk has been telling us that Tesla robotaxis are just a year away, give or take, since 2014. Why should electric-vehicle investors believe that this time, he's right?
I don't think Tesla is going to go bust. But I think that it's still wildly overvalued, that the correction in its share price has just begun, and that the bottom is still a long, long way off.
Tesla the company vs. Tesla the stock
Bulls and bears agree that Tesla has come a long way in recent years. It is now a well-run, profitable automaker that is the undisputed leader in the EV space. Where opinions differ, however, is how that lead will fair in an environment of increased competition. And what price is worth paying for Tesla stock.
Holding Tesla stock is fine if you like the long-term thesis and are aware of the risks of a very expensive valuation. However, other investors may be better off watching Tesla from the sidelines to see how it stacks up against the onslaught of EV capital investments from legacy automakers and new players.
