Over the trailing decade, no S&P 500 company has delivered a juicier return for its shareholders than electric vehicle (EV) manufacturer Tesla (TSLA -3.55%). Investors who've placed their faith in the company and its CEO, Elon Musk, have been rewarded with a return of just above 7,000% in a decade.
But even top-performing stocks hit rough patches. When the closing bell rang on Dec. 12, 2022, shares of North America's leading EV company were lower by 52% year to date.
The $64,000 question is: Does a more than halving in value make Tesla a buy? To answer that, you have to understand why shares fell in the first place, as well as dig into what catalysts and challenges lie ahead.
A Tesla Model S charging. Image source: Tesla.
Wall Street hit the brakes on Tesla stock in 2022
There's no single factor to blame that would neatly explain Tesla's struggles this year. Rather, it's been a confluence of factors.
To begin with, the COVID-19 pandemic has wreaked havoc on the supply chain for automakers. Tesla's Shanghai gigafactory in China has had its production adversely impacted by provincial lockdowns. Meanwhile, semiconductor chip and general parts shortages have slowed or delayed output.
Another problem for Tesla has been historically high inflation and the Federal Reserve's monetary policy shift to combat that inflation. Tesla is contending with soaring material costs, and higher rates could make it less likely that consumers are willing to spend big bucks on a new EV.
Bear market sentiment has done the company no favors, either. It's not uncommon for investors to give greater weight to traditional valuation metrics when the broader market has endured a sizable decline. Entering the year, Tesla was well above a triple-digit price-to-earnings (P/E) ratio in an industry known for high-single-digit P/E ratios.
Lastly, Elon Musk deserves some of the blame. Musk's acquisition of social media platform Twitter has been a distraction for much of the year. To add, he was required to sell billions of dollars of Tesla stock to provide the needed liquidity to finance the Twitter buyout. Insider selling, while sometimes benign, can send the wrong signal to investors.
What does 2023 hold in store for Tesla?
Now that you have a better understanding of why Tesla stock hit the skids in 2022, let's look ahead to what catalysts might fuel the company's sales growth and bottom line in 2023.
Arguably the biggest catalyst is the continued ramp up of the two new gigafactories that came online earlier this year in Berlin, Germany, and Austin, Texas. Tesla is on pace to surpass 1 million deliveries for the first time in its history in 2022, and has a real opportunity to lift production to north of 1.5 million EVs in 2023, assuming domestic and global supply chains cooperate.
Model expansion is another potential growth and valuation driver in the upcoming year. The Tesla Semi, which was unveiled in late 2017, began production in October, with deliveries beginning this month. Additionally, the much-awaited Cybertruck is expected to begin mass production sometime in late 2023. The Cybertruck has a healthy order backlog, and timely production could lead to a surge in operating cash flow in late 2023 or perhaps early 2024.
The new year also brings with it an opportunity for Musk to find a new CEO for Twitter. Tesla shareholders would certainly appreciate Musk devoting more of his time to overseeing things at the world's most-valuable automaker, instead of trying to turn around an underperforming social media platform.
Lastly, all eyes will be on Tesla's operating margin, which could benefit from a variety of cost reductions or credits. In particular, the Inflation Reduction Act (IRA) will provide consumers with a $7,500 credit, assuming Tesla's batteries meet the conditions set forth in the IRA.
Image source: Getty Images.
Is Tesla a stock to consider buying?
Tesla has now navigated through the headwinds that sacked the stock in 2022, as well as the biggest catalysts awaiting the company in 2023. It's time to the return to the all-important question: With shares down 52% this year, is it time to buy Tesla?
To be perfectly blunt, my answer is no.
Although production is picking up at the company's Berlin and Austin gigafactories, and the IRA provides added incentive for consumers to purchase an EV, the single greatest liability for Tesla in the new year has nothing to do with its production and everything to do with its CEO.
To many, Musk is a visionary. As CEO, he helped build Tesla from the ground up to mass production, which is something no other automaker had done in over a half century. But he's a distraction and liability that'll be hard for Tesla to overcome.
Putting aside the fact that Musk has drawn the ire of securities regulators on more than one occasion, his biggest issue is overpromising and underdelivering. For example, Level 5 full self-driving has been promised as being "one year away" since 2014, and the company is no closer to mastering autonomous driving now than it was back then. The expected production of the Semi and Cybertruck were also delayed by years. Although Musk's promises are baked into Tesla's valuation, rarely (if ever) do those promises come to fruition. That's a problem for a richly valued automaker.
The other issue to recognize is Tesla isn't immune to the challenges facing the auto industry. Ongoing supply chain issues are bad news for all automakers, and not just its competitors. That makes its nosebleed P/E ratio all the more avoidable now, and in 2023.
