The last 12 months have not been kind to stock market investors, with the Nasdaq Composite down 17% over the period. Tesla (TSLA -1.92%) hasn't escaped the carnage, with its shares collapsing by a whopping 44% over the same time frame.
But cooling inflation and resilient economic data suggest the market might be near its bottom. Let's discuss why Tesla stock could be an excellent opportunity to buy on the dip.
The era of overvaluation is over
Tesla has always been a fast-growing company with tons of potential. But it has not always been a good investment because of extreme overvaluation. According to data from the website Macrotrends, the company's price-to-earnings (P/E) ratio peaked at more than 1,100 in 2020 and remained above 200 until late 2021, when its market cap of over $1 trillion was worth more than the next five largest automakers combined.
Tesla's previous valuation was clearly unsustainable, especially considering that the S&P 500's average P/E is just 21. But Tesla shares now have a much more reasonable valuation multiple of about 47 times forward earnings. And while this is still more than double the market average, there are plenty of fundamental reasons Tesla's much more reasonable premium looks justified.
Tesla can win the price wars
It is widely projected that electric vehicles (EVs) will make up a sizable portion of all vehicle sales by mid-century. What is less predictable is how market share will be divided among the several automakers selling EVs. But Tesla has some very deep competitive advantages that can help it stay ahead of the competition.
Compared with legacy automakers, Tesla has the advantage of not selling vehicles with internal combustion engines, which means it won't cannibalize its own operations.
This could also boost margins. EVs are easier to mass produce because of their simpler designs (no parts like radiators, pistons, mufflers, and spark plugs). Tesla is one of the few companies that has managed to unlock these advantages at scale, putting it ahead of rivals like Ford, which expects to lose $3 billion from its EV efforts this year.
Image source: Getty Images.
Management also believes Tesla will be able to bring down the cost of its next-generation cars by half, which could make it extremely difficult for its rivals to hold their own in any potential price war. Well-established automakers will likely lean on their brands to stay relevant, but lesser-known players like Rivian or Lucid Group have a challenging road ahead.
Is a bull run coming?
With interest rates rising and uncertainty all over the economy, it's difficult to know when stocks will make a broad move upward. But Tesla's significant declines over the past 12 months seem to have priced in a lot of negative expectations, leaving room for the company's stellar fundamentals to power the next leg of growth.
