Tesla (TSLA 4.96%) is the definition of a battleground stock. Bulls see the company continuing to lead the electric vehicle (EV) revolution and branching into valuable new product and service categories, while bears tend to think that the hype surrounding the company has led to a bloated valuation.
With the company's share price currently trading off roughly 25% from its valuation peak, should investors be pouncing on this industry leader? Read on to see why two Motley Fool contributors come down on opposite sides of the bull vs. bear debate.
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Growing its product portfolio
Howard Smith: Much of the hype for investing in Tesla is that it is the standout leader in a sector that is primed for explosive growth. That thinking has helped some investors justify an extremely high valuation for the stock by traditional metrics. The company's price-to-earnings (P/E) ratio stands at over 100 even based on the higher analyst estimates for 2022 earnings.
But CEO Elon Musk sees the company eventually making up to 20 million vehicles annually, compared to something close to 1.5 million expected to be produced this year. That will take some time, however, and having the stock valued for results expected so far into the future may be why Tesla shares are down almost 15% year to date.
The company's growth won't just come from expanding ownership of electric cars, though. Musk has said the Tesla Semi truck should begin deliveries this year, and the Cybertruck next year. There are estimates of hundreds of thousands of Cybertruck reservations already. Not all will be filled, but Musk has said that Tesla has enough Cybertruck reservations to cover at least the first three years of production. If the Tesla Semi gains traction, too, those two new products will join the quickly growing volume of car models it now manufactures.
Investors should also not forget about Tesla's energy business. The company has been increasing production of the battery storage and solar systems it sells separately to customers as it also produces batteries for its electric vehicles. In its second-quarter report, the company said it continues to ramp up Megapack storage production as customer interest "remains strong and well above our production rate." Tesla is also looking at getting into lithium refining to secure its supply chain and control costs.
While Tesla stock may not look to have too much upside in the near term, investors will likely be looking at future potential, which could also limit its downside. As long as the new products succeed and the company continues to execute, Tesla should be a good stock to have in a more aggressive portion of a portfolio.
Tesla is a great company, but valuation is a sticking point
Keith Noonan: Even after recent valuation pullbacks, Tesla still has a market capitalization of roughly $967 billion. That's significantly more than the combined market caps of its 15 largest public competitors in the auto market. At the same time, many of those larger competitors are currently generating more revenue and net income than Tesla.
Elon Musk's company is still posting rapid growth, and along with the business's superior margins, its impressive rates of sales and earnings expansion certainly justify some level of valuation premium. But just how much of a valuation premium will the business's long-term performance go on to justify? The automotive market is intensely competitive, and the EV space is becoming increasingly crowded thanks to new models from manufacturers big and small. Tesla is still the clear leader in the space, and its focus on high-end vehicles could help it maintain stronger margins, but competing offerings could start to hurt pricing power or limit the company's growth potential in the market.
As my colleague Howard rightly points out, Tesla is more than an auto business. Its initiatives in battery and energy technologies could have huge payoffs that help push its valuation significantly above current levels. The company may also be able to generate substantial revenue from licensing its autonomous driving technology or other software. On the other hand, Tesla will also face intense competition in these categories, and I think they seem like somewhat speculative points to hang such a massive valuation on.
Should investors buy Tesla stock today?
Investors should weigh their assessment of Tesla's long-term growth potential against its current valuation when making decisions about whether to buy the stock. With its large market capitalization, there's already plenty of strong forward performance baked into the company's valuation, and the stock could face outsize turbulence if volatility continues to shape the broader market. On the other hand, Tesla is the clear leader in the EV market, and it has growth opportunities in other categories that could help power strong returns for the stock over the long term.
