Stocks hit the ground running in 2023, with the Nasdaq Composite up by 13.6% year to date as outsized inflation levels off and resilient economic data suggest the economy could avoid a severe recession.
While it is foolish to predict the market's specific future, it's probably safe to deduce that Tesla's (TSLA 0.57%) stock is benefiting from these tailwinds. And I'm pretty confident asserting that the automaker's company-specific advantages will help it outperform the market over the long term. Here are three reasons why.
1. Tesla now has scale
Competition is heating up in the electric vehicle (EV) industry, leading some analysts to expect near-term challenges among EV makers to match consumer demand. Tesla responded to recent pressures by announcing price cuts on some of its models. According to Reuters, the automaker slashed the sticker prices on some models by around 20%. This strategy is most evident in the Chinese market, where its cars are roughly 40% cheaper than in the U.S.
But investors shouldn't look at these moves as a sign of desperation. Instead, Tesla is demonstrating the power of its scale, showing that its circumstances allow it to make such moves and remain competitive. That suggests the company has a deep economic moat.
2. Tesla is profitable
In full-year 2022, Tesla's operating income more than doubled to $13.7 billion. This number puts it head and shoulders above pure-play rivals like Lucid and Rivian, which both lose money in their operations. As a profitable company, Tesla has a lot of room to keep prices lower for longer to maintain and grow its market share. And it is less dependent on external financing (which creates debt to manage). That's a powerful advantage right now as financing has become more expensive with the sharp rise in interest rates.
The 2022 Tesla Roadster. Image source: Tesla.
3. Tesla's valuation is still reasonable
With a market cap of $623 billion, Tesla is not a small company. In fact, it's worth more than every other American automaker combined. From a valuation perspective, the stock's forward price-to-earnings (P/E) multiple of 48 is significantly higher than those of traditional rivals like Ford Motor Company or General Motors, which have P/Es of 7.5 and 6.7, respectively, despite large sales volume and an ambitious transition to EVs. Still, Tesla's valuation isn't as astronomical as it seems on the surface.
As a pure-play electric automaker, Tesla shouldn't be valued in the same way as traditional car companies transitioning to the technology. These companies will likely cannibalize their existing gas-powered lineups with EV alternatives, while Tesla enjoys "pure" growth. Tesla's relatively good growth expectations help further justify its valuation. Management expects vehicle deliveries to grow by an average compound annual growth rate (CAGR) of 50% over the long term. This could translate to significant revenue and profit growth.
Is the stock still a buy?
After soaring 58% year to date, Tesla stock is no longer as cheap as it was at the start of 2023, leading analysts like Morgan Stanley's Adam Jonas to conclude that investors may have missed their "window of opportunity" to buy the stock at a compelling valuation. But a long-term investment strategy is the key to sustainable returns in the stock market. And despite the higher price tag, Tesla still looks like a buy when considering where it could be 10 years from now (and not just 10 months from now).
