One of the most polarizing stocks in today's market is Tesla (TSLA -0.52%). Bears will tell you it's just an over-valued automaker, while the bulls will claim it's a technology company that makes cars. In reality, it's a mixture of these things, but investors have to determine which case has more merit.
In 2022, the stock fell 65% -- giving the bears the performance they expected. However, it is already up 35% from the start of 2023 -- reinvigorating the bulls. So is this your signal to buy Tesla stock? Or has the stock (once again) run up too far and too fast? Let's find out.
Gross margins are falling, but there's a floor in place
CEO Elon Musk, who holds that title at Twitter, SpaceX, and numerous other companies, is at the center of the Tesla criticism. Unless you've had your head in the sand, it's pretty apparent Musk has spent a lot of time improving his new $44 billion toy in Twitter. To make matters worse, about 50 Tesla engineers voluntarily worked on Twitter.
Clearly, this could be somewhat of a distraction, and it worried many investors.
However, Tesla's latest quarterly results seemed to wipe away those fears. In the fourth quarter, Tesla's production was quite impressive.
| Model | Q4 Production | YOY Growth |
|---|---|---|
| Model S/X production | 20,613 | 57% |
| Model 3/Y production | 419,088 | 43% |
| Total production | 439,701 | 44% |
Data source: Tesla. YOY = Year over Year.
While these production numbers are impressive, there were a few other numbers that might concern investors. First, its day of supply inventory (how many days it would take Tesla to deplete its current vehicle inventory) rose to 13 days, which marks an increase from the third quarter's eight and the second quarter's four.
Now, one could argue 13 days is still relatively little supply (which I'd agree with), but investors should keep an eye on this number to ensure it doesn't reach an egregious level. That would indicate Tesla is building vehicles, but there isn't consumer demand to buy them. For historical reference, this metric rose to 31 days in first-quarter 2019, so Tesla still has a ways to go before reaching this threshold.
Another issue investors zoomed in on was Tesla's margin pressure. In Q4, Tesla's automotive gross margin fell to 25.9% -- the lowest in five quarters. Falling gross margin can indicate increased cost of goods or weak pricing power, and with Tesla cutting prices on its models, this metric will come under further pressure. Still, CFO Zach Kirkhorn stated in the conference call that Tesla expects to post at least a 20% gross margin moving forward, even with the price cuts.
This move will likely cause the automotive gross margin to fall to its lowest point in five years in 2023.
| Year | Automotive Gross Margin |
|---|---|
| 2018 | 23.4% |
| 2019 | 21.2% |
| 2020 | 25.6% |
| 2021 | 29.3% |
| 2022 | 28.5% |
Data source: Tesla.
Lower gross margins mean less capital to make profits from, but Tesla offset that with a 16% reduction in operating expenses -- something few other companies can say occurred in Q4. Those cost savings allowed Tesla to post $1.07 in Q4 earnings per share (EPS) -- a 57% increase.
So while Tesla investors have a few items to watch -- margins and inventory -- the quarter was great financially. But even the best companies bought at the wrong price can be a poor investment, so is the time right to buy Tesla?
The stock is still expensive, but it's becoming more reasonable
Inherently, there will be a massive disconnect between how bears and bulls think Tesla should be valued. Currently, Tesla trades at 49 times earnings, which isn't as bad as the 100 times or more it traded at during 2021. However, looking at Tesla's forward price-to-earnings (P/E) (which utilizes 2023 earnings projections) reveals another trend.
Data by YCharts.
With Tesla's trailing P/E ratio about the same as its forward P/E, analysts think Tesla's earnings will barely grow over 2022's levels.
For 2023, Tesla plans on achieving its 50% compounded annual growth rate of vehicle delivery since 2020, indicating about 1.7 million deliveries in 2023, or a 29% rise over 2022's numbers. Even with a slight gross margin compression, if Tesla can achieve its delivery goal, it will likely beat earnings estimates -- making the stock seem cheaper than it truly is.
Still, 45 times forward earnings isn't a cheap price to pay for any company. If you're committed to Tesla for the long term (three to five years), buying some shares now and holding on (while watching the business) might be a smart move. However, the valuation still poses a risk, and if Tesla slips up and fails to deliver on its projections, the stock could get rapidly sold off.
Tesla is far from a safe stock, but it's still an intriguing investment opportunity at these levels.
