Up by a whopping 82% year to date, Tesla (TSLA 4.96%) stock is rapidly bouncing back after its poor showing in 2022. While the electric automaker faces some challenges in a tightening industry, its profitability and valuation should position it for lasting success. Let's explore some reasons why Tesla's shares could be a no-brainer buy.
What happened in 2022?
Despite its significant 2023 rally, Tesla's stock is still down 52% from its all-time high of roughly $410 reached in November 2021. Over the last 12 months, the pure-play electric automaker has faced several challenges.
In October Tesla's CEO Elon Musk completed a $44 billion buyout of social media company Twitter, a move that pushed him to sell billions of dollars of Tesla shares. There were rumours the transaction could distract him from his work at the company. On the operational side, many investors were worried that a possible EV recession could crush Tesla's sales and margins.
However, Tesla's leadership challenges seem overblown. While Elon Musk played a key role in steering the company through near bankruptcy in 2008, it's a totally different story today. Tesla is now well-capitalized and sustainably profitable, making it less reliant on the guidance of a single individual. Further, the automaker has likely built up an experienced management team that can run its day-to-day operations with or without Musk.
What about the EV recession?
Tesla's struggle with a possible electric vehicle market slowdown is arguably its biggest headwind. Morgan Stanley analyst Adam Jonas believes the industry is moving from a position of undersupply to oversupply, which could make automakers underperform in 2023. The fears are not unfounded. In 2022 Tesla embarked on a round of massive price cuts, which slashed its price by roughly 20% globally, according to Reuters.
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Tesla's price cuts come after Elon Musk warned that a recession and higher interest rates could hurt operations. But the bigger challenge could be competition from fast-growing rivals like Lucid and Rivian, which are attempting to replicate its business model. That said, Tesla is significantly better capitalized than these upstarts.
Tesla generated a whopping $19.2 billion in 2022 adjusted EBITDA. And as a profitable company, it will be much less reliant on external financing such as debt or equity dilution. This makes it less vulnerable to rising rates and the bear market in stocks, which have made both sources of capital more expensive. And while Tesla still must contend with large traditional automakers making the EV transition, it has the advantage of "pure" growth in the industry while other companies cannibalize their existing internal combustion-based platforms with electric alternatives.
Is the valuation still good?
After its significant rise in 2023, Tesla stock isn't as cheap as it was at the start of the year. With a 12-month forward price-to-earnings (P/E) multiple of 44.6, the automaker is priced at almost double the NASDAQ 100's forward P/E of 24.9.
That said, Tesla still represents a good value considering its top- and bottom-line growth rates. Fourth-quarter earnings per share (EPS) jumped 57% to $1.07. And management expects production to grow at a compound annual growth rate (CAGR) of 50% over the long term, which could lead to sustainable revenue and profit growth.
