Serial entrepreneur Elon Musk seems to have a knack for the limelight. When he's not sending rockets into space with his exploration company, SpaceX, he can often be found at the center of some discussion on social media platform Twitter, which he also owns. Nevertheless, perhaps Musk's most notable brand is his electric vehicle (EV) company, Tesla (TSLA 4.96%).
Recently, Musk and his executive team hosted their highly anticipated investor conference. Typically, during these events, Musk is known to reveal new products and services and paint a roadmap for Tesla's future. Needless to say, Tesla stock usually tends to swing in the days leading up to these investor days.
In this instance, however, investors and Wall Street seemed less enthused. Tesla stock declined nearly 13% over the last five trading days since the event. As Tesla stock continues its downward momentum, some investors may wonder if it is an attractive buy at this valuation. Let's dig in.
Unpacking the conference
Last week, investors from around the world flew to Austin, Texas, or tuned into an internet livestream to watch Elon Musk reveal more details about his vision for Tesla. What followed was a 169-page deck that took several hours for Musk and his team to review.
Perhaps the most noteworthy takeaway from the presentation was Tesla's estimated $10 trillion investment it plans to make in manufacturing among the following: renewable energy grid ($0.8 trillion), transition to EVs ($7.0 trillion), heat pumps ($0.3 trillion), high-temperature thermal ($0.8 trillion), and planes and ships ($1.0 trillion).
Basically, Musk is telling investors that he sees Tesla as more than just an automotive company. His vision to push green energy further into the DNA of society means Tesla allocating capital to other forms of transportation and innovative features in manufacturing. The problem? Investors kind of already knew all this.
Another important takeaway was that management confirmed that Tesla would be building a new factory in Mexico. The problem? As a company that has proclaimed it will do whatever it takes to be the global leader in EV and green energy, investors would expect the company to continue building factories.
Here's the bottom line -- while this investor conference contained some interesting food for thought, it lacked the pizazz of past presentations. Besides a monthly plan for overnight home charging, very little was revealed about new products, services, car designs, and so forth.
While the home charging initiative could create more recurring revenue for Tesla, obviously, not all current owners will adopt this plan. Furthermore, the company will need to execute on its future production targets for this to impact Tesla's business meaningfully.
Image source: Getty Images.
Stock price volatility is real
The table below illustrates Tesla's stock price over recent periods.
| Time Period | % Change |
|---|---|
| Year to date | 60.4% |
| Last 30 days | -10.9% |
| Last 5 days | -12.7% |
Toward the end of 2022, Tesla stock began to crater. Much of this was attributed to cyclical trends in technology and software companies, particularly those on the Nasdaq. More specifically, big tech companies like Microsoft, Amazon, Alphabet, Salesforce.com, and others were calling for slowdowns in growth due to waning consumer demand stemming from lingering inflation and fears of recession.
Ironically, this rhetoric was completely contrary to Musk's proclamations during Tesla's third-quarter 2022 earnings call. In a way, though, this type of paradigm is exactly what investors should be analyzing. On the one hand, some of the world's largest technology companies reported high-double-digit annual revenue growth and boasted strong, liquid balance sheets in the September and October time frames.
Merely a few months later, stock prices in these very same cohorts began to plunge due to pessimistic expectations from investors. In reality, the majority of these technology companies reported fairly strong earnings for Q4 2022, including Tesla.
Some investors saw a buying opportunity in early 2023 before Tesla reported Q4 earnings. Several buyers joined the momentum, leading to a surge in Tesla's stock price. Clearly, this upswing reached a fever pitch in mid-February, as Tesla's stock price had nearly doubled in terms of absolute dollars from its January lows.
Even so, it's interesting to see that since reporting earnings at the end of January, Tesla stock dropped but not in an overdramatic fashion. In other words, despite a sell-off over the last month or so, the stock price is only down roughly 11%. When accounting for a fairly mundane investor conference, vehicle price cuts, and recession fears, all things considered, Tesla stock appears to have some fundamental support.
Is valuation attractive?
Tesla's valuation is often a hot topic among Wall Street strategists. For example, Ark Investment Management CEO Cathie Wood is a longtime Tesla bull and is known to declare eyebrow-raising price targets for the stock publicly. By comparison, other investors will say Tesla is very much an automobile manufacturer, as opposed to a technology company, and does not deserve the premium multiples the capital market assigns to it.
Two multiples worth analyzing are price-to-earnings (P/E) and the price/earnings-to-growth, or PEG, ratio. As of the time of this article, Tesla's P/E is nearly 54 times. However, as of December 2022, before the stock's run-up, its P/E was 38 times.
For reference, the long-run average of the S&P 500 is between 15 and 16 times P/E. While Tesla is clearly valued at a significant premium to the overall market, it's important to note the disparity between its P/E ratio at the end of December versus now.
Tesla's PEG ratio is 1.8 times. The PEG ratio is similar to P/E, but it accounts for growth in earnings. As a rule of thumb, a PEG ratio of 1.0 or lower may imply that a stock is trading below its intrinsic value. Unsurprisingly, like its P/E multiple, Tesla's PEG ratio was 1.1 at the end of December 2022 and has risen dramatically over the last few months.
Given this analysis, it could be appropriate to assume that Tesla's stock price is slightly overvalued. However, only a few months ago, it did appear to be a potentially good buying opportunity. Given the recent sell-offs, particularly among technology companies, it would not be surprising to see Tesla stock drop more toward its December range.
In that case, Tesla stock could present a very interesting buying opportunity. But long-term investors must remember that time in the market is more important than timing the market, in which case, now is likely a decent time to lower your cost basis as the stock dips slightly but also contains a strong support base.
