Tesla (TSLA +2.41%) is one of the stock market's biggest winners in recent memory. Over the last decade, the electric vehicle (EV) innovator's share price has climbed more than 10,400%, and the business has been growing sales and earnings at an incredible clip. However, the company's share price also took a big dip in 2022, and there are questions about whether the business can live up to its growth-dependent valuation.
Let's take a closer look at the bull and bear cases for this company from two Motley Fool contributors.
Image source: Tesla.
The bull case for Tesla: A speed bump in its growth rate
Howard Smith (Tesla): It seems like everywhere you turn, you see negative news about Tesla or its CEO Elon Musk these days. The EV trailblazer was priced for success in its vehicle business as well as its other ventures heading into 2022, so the recent headwinds have taken their toll on Tesla shares.
That shouldn't come as a huge surprise, since the company was valued at more than $1 trillion to start the year, giving it a price-to-earnings (P/E) ratio of more than 200 at the time. Investors believed the incredible growth trajectory in the business would continue.
Data source: Tesla. Chart by author.
But it's likely that the current headwinds won't be long-term issues. Supply chain disruptions are hitting manufacturers globally, and aren't going to be permanent. As the largest EV company, Tesla is likely to have relationships with suppliers that will help it navigate solutions. The supply chain issues come just as the company is trying to ramp up production at its two new plants in Germany and Texas. That isn't optimal and definitely is costly, but at least the plants are in production and should be set to ramp up when the situation allows.
There are certainly some things to be concerned about. Elon Musk has been distracted by his interactions with Twitter, and that is likely to get worse before it gets better. Tesla's autonomous driving leader, Andrej Karpathy, also recently left the company. Investors will have to monitor how the company moves forward in this nascent category.
Tesla is going to report a sequential drop in earnings in its second quarter. The COVID-19-related production delays at its Shanghai plan ensure that. But with the stock price down more than 30% year to date, if its headwinds are indeed short-term, investors might find its recent price a good opportunity for a long-term holding.
The bear case for Tesla: Its valuation may prove overly optimistic
Keith Noonan: Tesla has an extremely growth-dependent valuation for a company whose core business still hinges on success in the highly competitive automotive market. There's no question that the EV innovator is generating superior margins compared to its main competitors in the auto space, and its sales and earnings growth continue to trounce those of the competition. Admittedly, Elon Musk's company also has other roads to expansion.
NASDAQ: TSLA
Key Data Points
Beyond just selling electric vehicles, Tesla will also have opportunities to license its battery and self-driving technologies. These initiatives may help justify the valuation premium that the stock commands relative to other players in the auto space and help shares post more big gains over the long term. But it's worth noting that these product and service categories are becoming increasingly competitive as well. And it bears repeating that Tesla stock commands one heck of a valuation premium.
In fact, with a market capitalization of roughly $746 billion, Tesla is still 1.8 times the size of its three largest competitors combined.
TSLA Market Cap data by YCharts
Tesla's market cap is also nearly eight times the combined market caps of Ford and GM, despite still posting less net income than each of those companies on an individual basis.
Other major auto manufacturers are rapidly moving into the EV space, and the bloom may come off the rose on Tesla as the range of offerings in the category continues to expand.
Should you buy Tesla stock?
Tesla is arguably one of the most innovative companies of the 21st century, and it's continued to serve up impressive revenue and earnings growth. On the other hand, competition is heating up in the EV space, and the company will need to work in order to serve up strong stock returns from current pricing levels.
If you think that Tesla will continue leading the EV revolution, recent pullbacks for the company's share price could present a worthwhile buying opportunity. Otherwise, investing in a more conservatively valued automaker or companies in the battery and charging markets may be more suitable plays if you're looking to benefit from the EV trend.
