A couple of years ago, many would have laughed if you'd called Tesla's (TSLA 12.06%) stock a good value investment. But after a 64% decline over the last twelve months, the company finally looks cheap relative to its earnings and long-term potential. Let's discuss three reasons why the beaten-down automaker could be an excellent buy for long-term investors in 2023.
1. Elon Musk-related headwinds look overblown
Like many companies, Tesla faces significant near-term challenges like inflation and rising rates, which increase the cost of capital and hurt growth stock valuations. Investors may also be concerned about the activities of the company's CEO, Elon Musk, who purchased social media company Twitter for $44 billion in October.
In 2022, the billionaire sold a whopping $23 billion worth of Tesla stock to help fund the acquisition. But while stock sales can hurt a company's price in the near term, this shouldn't mean much for fundamental-focused investors. Unlike equity dilution, where new shares are created, the sale of already-existing shares doesn't impact Tesla's value relative to its earnings or cash flow. While some believe the Twitter acquisition is a distraction for Musk, this fear also looks overblown.
Tesla has come a long way from the spiraling losses that almost forced it to the brink of bankruptcy in 2008. Now that the company is well-capitalized and sustainably profitable, one man's managerial skill and tenacity are arguably less important to its continued success.
2. Epic profitability
Tesla is becoming a profit machine, standing head-and-shoulders above its peers in the automotive industry. In the third quarter, total revenue jumped 56% to $21.45 billion while net income doubled to $3.29 billion. Tesla's largest rival, Toyota (which still mainly produces gasoline-powered cars), only generated $3.15 billion in the corresponding period despite selling seven times more vehicles, according to Nikkei Asia.
Nikkei Asia believes that Tesla's edge comes from its strong brand, which allows it to charge a premium for its vehicles. The company's narrow focus on EVs also gives it a streamlined production process compared to traditional automakers, which produce a wide variety of electric, hybrid, and gasoline-powered vehicles.
Image source: Getty Images.
Some industry watchers believe Tesla's business is slowing after a series of price reductions in China, a move the company's vice president for external relations in China credits to "innumerable engineering innovations." Investors should remember that the price cuts come amid a broader (and likely temporary) auto industry downturn amid high inflation, high-interest rates, and consumer confidence.
Tesla's management remains optimistic for the long term, expecting vehicle delivery growth averaging 50% annually over a multi-year horizon.
3. A relatively cheap valuation
After many years when the stock was arguably overvalued, it's understandable that many investors still look at Tesla with a little side eye. In early January, well-known value investor Bill Miller announced his short position on the company, telling CNBC that he doesn't "think it's worth more than the top five automakers in the world combined." But while Tesla's market cap of $360 billion is high, that only tells one side of the story.
As a pure-play electric automaker, Tesla should be valued differently than traditional automakers that are transitioning to the technology. That's because Tesla enjoys "pure" growth in the EV industry, while its rivals are cannibalizing their existing products with electric alternatives, a strategy that could cost them total market share over the long term. And as mentioned earlier, Tesla enjoys above-average profits.
With a forward price-to-earnings multiple of just 23, Tesla is no longer an expensive stock by any stretch of the imagination when considering its growth rate. That number is significantly lower than the NASDAQ average of 25, and falls behind mature value stocks like McDonald's and Coca-Cola, which both boast forward multiples of 26 and 25, respectively. It's hard to see the shares staying this cheap for very long.
