Investors have grown apprehensive about what will happen to demand for Tesla's (TSLA +0.91%) electric vehicles in a weaker economic environment for large consumer discretionary purchases. As a result, many shareholders bolted, and the stock finished 2022 down 65%. But after the stock slumped by 12% on its first trading day of 2023, some investors now wonder how close the global EV manufacturer is to a bottom that could provide a once-in-a-lifetime opportunity to buy.
Let's take a look at a few risks Tesla faces, and why, in spite of them, investors still might want to buy the stock in 2023.
NASDAQ: TSLA
Key Data Points
A 'recession of sorts' in China
Auto industry analysts pay close attention to trends at Tesla's Shanghai plant, the company's largest vehicle manufacturing site. And what investors are seeing has them scared.
Wall Street was already aware of the production problems Tesla was experiencing at its Shanghai plant due to temporary shutdowns and supply chain disruptions driven by the surge in COVID-19 cases in China. However, investors are more concerned about declining demand for the EVs in China due to its collapsing real estate market and weakening economy.
During the company's third-quarter earnings call, Chief Executive Officer Elon Musk said China is experiencing a "recession of sorts," driven by a property market collapse. The International Monetary Fund expects that China will report that its gross domestic product growth dropped to 3.2% in 2022, a sharp slowdown from its growth of 8.1% in 2021. And this slowdown is already impacting Tesla.
Even though Musk strongly insisted during the third quarter earnings call that the company is still maintaining high demand, its actions suggest otherwise. For example, around Oct. 24, many media outlets reported that it had cut EV pricing in China. In addition, some analysts have proposed that the company is seeing slowing demand, a battery supply glut, and a price war.
Problems in the U.S., too
One bearish argument that has haunted Tesla throughout its history is that its growth story would end once competition arrived. So once the market saw data from S&P Global Mobility in late November 2022 showing the company's EV market share had declined to 65% from 80% in 2020, the bears had one additional arrow with which to shoot the stock price down.
Another particularly irritating overhang on Tesla's stock price is Musk's acquisition of Twitter, which Tesla investors hate for two reasons. First, many fear that Twitter is a significant distraction to Musk and could potentially hurt the Tesla brand. Second, Musk has sold Tesla stock to inject more cash into Twitter. Investors dislike when Musk makes significant stock sales, as it hurts the stock price. For instance, after financial filings showed that Musk sold $3.6 billion of stock in mid-December, the stock fell by 22% to close out 2022 at $123.18. Tesla's stock price may only recover after Musk limits his day-to-day involvement in Twitter, if he does.
Why the stock is still a buy
One factor that Tesla bears ignore is that the company can now withstand a recession without significantly altering its plans. Contrast that to the period between 2017 and 2019, when the company was in the run-up to the Model 3 launch. Musk later admitted that the company was at that time close to bankruptcy.
TSLA Cash and Short Term Investments (Quarterly) data by YCharts.
Tesla now has plenty of cash compared to long-term debt. In addition, it has positive free cash flow, having produced $3.3 billion in 2022's third quarter and $8.9 billion over the 12-month period that ended Sept. 30. Last, it had a debt-to-EBITDA ratio of 0.32 in the third quarter, suggesting it could quickly pay its debts.
Tesla can do more than survive a downturn. It can thrive once those economic headwinds are in the rearview mirror. Despite increased competition, the company has maintained a technological advantage, evidenced by its lead in EV battery production. For instance, it is rapidly ramping up its new 4680 battery cell. And according to Reuters, experts claim that this cell pack for the Model Y will have roughly half the manufacturing cost of its older battery pack, shaving more than 8% off the car's price. Such improvements are helping it create more affordable vehicles than its competitors with better performance.
Should it maintain a technological lead in batteries, artificial intelligence, and other areas, Tesla could maintain dominance for at least a decade, in a similar way to how Intel maintained dominance in logic chips for an extended period by keeping its initial technology lead over its peers.
Considering that the stock's valuation continues to drop like a rock, the possibility for a $5 billion to $10 billion share buyback, and that the company is still in growth mode, Tesla should be near its rock-bottom valuation.
If you are a risk-taker and are willing to put up with Musk's escapades, a better time for you to buy Tesla's stock may never present itself again.
