Tesla (TSLA -3.55%) stock has been underwater in recent memory -- shares of the electric vehicle (EV) giant have been down 45% since the start of 2022. This has led to very polarizing views of the stock, with the bulls insisting that now is the perfect buying opportunity and the bears alleging that the sell-off has just begun.
As many different factors continue to affect the stock market, it'll be extremely interesting to watch the next few months pan out. Will Tesla bounce back in the second half of the year, or is the Elon Musk-led business bound for darker days?
Here is one reason to pull the trigger on the EV stock and two reasons to look the other way for now.
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Buy Tesla because business has never been better
Don't get it twisted -- the EV leader's business is thriving today. In the first quarter of 2022, total revenues soared 81% year over year to $18.8 billion, and adjusted earnings per share crushed Wall Street estimates by 42%, surging 246% to $3.22. To put the cherry on top, its business is becoming increasingly profitable, with its GAAP (generally accepted accounting principles) operating margin expanding 1,349 basis points year over year to 19.2%. Although supply chain bottlenecks persisted in disrupting the industry as a whole, production and deliveries still grew at a rapid clip. Total production climbed 69% to 305,407, and total deliveries rose 68% to 310,048.
If Wall Street analysts are on par with their assumptions, then the next two years appear bright for the EV juggernaut. In fiscal 2022, analysts project total sales and adjusted earnings per share to grow 59% and 79% year over year, up to $85.6 billion and $12.11, respectively. Next year, the company is projected to expand its top line by 36% to $116.4 billion, and its bottom line is estimated to increase 32% to $15.95 per share. Combine these surefire growth rates with Tesla's $17.5 billion in cash on its balance sheet and $2.2 billion in free cash flow (FCF) generation in Q1, and investors can be confident about the company's business trajectory moving forward.
Keep your distance because of macro conditions and valuation
Before buying shares of the EV leader, there are several pitfalls to be aware of. For starters, the current economic backdrop does not offer an ideal scenario. Record-high inflation has caused the company to increase its car prices across the board, making them less affordable than before. Likewise, supply chain restraints are expected to limit production for the foreseeable future, and there's always potential for more factory shutdowns if COVID is to get out of hand. Coupled with the war in Ukraine, which has added just another layer of pressure on the stock market, and CEO Elon Musk's latest Twitter-related headlines, and it's clear that there are many moving parts that could weigh down Tesla stock in the coming days.
Despite its latest pullback, the EV stock still isn't trading at an optimal valuation. Tesla's price-to-sales and price-to-earnings multiples are the lowest they have ever been, but the story changes when comparing its valuation to other automobile manufacturers. Today, the EV king is trading at 53.8 times forward earnings, representing a huge premium to traditional car makers Ford and General Motors, which currently peg forward price-to-earnings multiples of 6.3 and 4.8, respectively. Thus, it looks like those who want a piece of Tesla's growth story will have to pay a rich price for the stock today.
Long-term investors should jump on Tesla today
It's never a good idea to try to time the stock market. It's certainly a possibility that near-term headwinds push Tesla's stock price lower in upcoming trading sessions, but the company's fresh pullback presents investors with a unique buying opportunity. And while it's true that the stock trades at towering valuation multiples compared to traditional auto companies, it's important to remember that Tesla enjoys superior growth rates and exceptional commercial prospects in the long run. Plus, the stock has historically been successful in growing into its lofty valuation levels, and I don't think that'll change in the years to follow. Investors should cash in on the market's madness today by accumulating shares of the world's number-one EV enterprise.
