Just two months into the year, Tesla (TSLA 2.99%) is already the best-performing S&P 500 stock year to date. But even after its meteoric ascent, the stock is still down 51% from its all-time high. And many bullish investors believe that the stock could eclipse that high over the next 5 to 10 years.

Let's discuss why the electric vehicle (EV) leader is a fundamentally strong company and why its long-term goals aren't as lofty as they might seem.

A person wearing a straw hat and shades smiles while extending out of the passenger window of a vehicle.

Image source: Getty Images.

Big pops and steep drops

Tesla stock is already up a mind-numbing 69% year to date and has more than doubled from its 52-week low. But long-term Tesla investors know that volatility is simply par for the course when it comes to the world's top EV maker. For example, the last few years of Tesla stock's performance showcase big moves in both directions. And the annual performance doesn't even tell the full story of the drastic swings the shares experience month to month or even week to week.

Year

Annual Performance

2023 (as of 2/27)

68.6%

2022

(65%)

2021

49.8%

2020

743.4%

2019

25.7%

Data source: YCharts.

Collapses of Tesla stock (like we saw in 2022) followed by quick spikes (in 2023) make the company a volatile and often perplexing stock. Given the price action, it's easy to get caught up in the battleground narrative and try and take a side for or against Tesla. But there's a better way to approach this business: through the performance of the company instead of the stock.

A foundation that keeps getting better

Love it or hate it, there is no denying how impressive Tesla is as a company. It has completely disrupted the auto industry to the point that nearly every major legacy automaker has now implemented an EV plan or is already actively producing EVs. It has also sustained a very high top- and bottom-line growth rate despite being a far larger company today than it was a few years ago.

TSLA Revenue (Annual) Chart

TSLA Revenue (Annual) data by YCharts.

Tesla is one of the few automakers with a net cash position. It also generates gobs of free cash flow and is accelerating profits thanks to its high margins.

During its Q4 2022 presentation, Tesla guided for 2023 production of 1.8 million cars. The company also said it would be able to sustain a 50% compound annual growth rate (CAGR) for vehicle production over the long term. For context, the company produced 47% more cars in 2022 than in 2021. In 2018, it only produced 254,530 cars -- meaning it grew production by more than fivefold in just four years.

CEO Elon Musk has often stated that Tesla's goal is to sell 20 million cars annually by 2030. Based on 2022 production of 1.369 million vehicles, Tesla would have to achieve a 46.7% CAGR to get to 20 million vehicles by 2030.

If Tesla hits its 2030 goal, it will likely be the most valuable company in the world. But even if growth slows, the company has proven that EV production at scale without dealerships is an excellent business model.

A premium valuation

The biggest headwind for Tesla has always been its valuation. But as the company's surge in sales and profits has proven, a business can grow into a sky-high valuation over time. Tesla stock's collapse in 2022, paired with all-time high revenue, earnings, and FCF, knocked its valuation down to reasonable levels.

TSLA PS Ratio Chart

TSLA PS Ratio data by YCharts.

At the beginning of 2023, Tesla had a price-to-earnings ratio under 30, a price-to-sales ratio under 5, and a price-to-free cash flow ratio under 50. Since then, all three metrics have gone up as the stock price has risen. So while there's no denying that Tesla stock simply isn't as cheap as it was at the beginning of the year, its valuation isn't unreasonable if the company can keep growing at a breakneck pace.

How to approach Tesla stock after its big run

The history of Tesla has been riddled with bold and often controversial decisions and overly optimistic forecasts that have wreaked havoc on the short-term performance of the stock price. But one thing that Tesla has done very well is deliver on its promises, even if it takes longer than expected.

Holding Tesla stock takes a unique blend of imagination, grit, and, perhaps most importantly, patience. As volatile as the company has been, it will likely continue to be an excellent long-term investment.

One of the biggest mistakes an investor can make is allocating too much attention, time, and money to one stock. The bigger the position, the easier it is to make an impulsive decision when stock prices are falling with no end in sight. Therefore, the best approach for most investors could be to own a reasonable but not overly sizable position in Tesla and then let the multi-decade investment thesis play out. That way, there's less pressure, and short-term gyrations in either direction won't cause undue anxiety.