Tesla (TSLA +0.53%) stands as one of the most incredible business success stories of the last decade. The electric-vehicle leader scaled rapidly and now serves up impressive profits, and its share price skyrocketed more than 6,780% over those 10 years. Conversely, the automotive innovator's share price also saw a substantial pullback in the past year in conjunction with macroeconomic pressures that depressed valuations for growth-dependent companies. Its share price is now down nearly 55% from the high it reached in November 2021.
Is Tesla gearing up for another bull run that has the potential to deliver millionaire-maker returns for investors? Or is the stock still too risky after having fallen by more than half from its valuation peak? Here's a look at the EV company's current business profile, growth opportunities, and the risk-reward profile of its stock.
Image source: Tesla.
Tesla saw strong core business performance despite macro headwinds
Tesla grew revenue roughly 37% year over year to reach $24.3 billion in 2022's fourth quarter. The company's Q4 performance pushed annual sales up 51% for the year to reach $81.5 billion, and net income more than doubled to reach $12.6 billion.
Despite macroeconomic headwinds, Tesla saw solid momentum for vehicle deliveries continue in the first quarter of 2023. The company produced roughly 440,800 EVs in the first quarter, coming in ahead of the midpoint analyst estimate for 430,000 vehicles produced in the period.
Meanwhile, vehicle deliveries rose 36% year over year in the first quarter to reach 422,875. This represents a substantial deceleration from the roughly 68% year-over-year growth in vehicle deliveries posted in the prior-year quarter, but the business still seems to be heading in the right direction, and the drop-off is less concerning when viewed in the context of today's macroeconomic pressures.
Admittedly, the company implemented some significant price cuts this year, but Tesla is enjoying fantastic scale advantages and brand strength that give it pricing power in the auto market. This advantage is helping it generate margins that are still relatively strong and put pressure on the competition. With the price cuts introduced by the company this year, the automaker is creating challenges for rivals that aim to move in on its turf, and it still has opportunities to sell added services to customers who buy vehicles at lower rates.
Emerging growth opportunities
As the chart shows, automotive sales remain far and away Tesla's largest revenue driver, but its Energy Generation and Storage, as well as Services and Other, segments are becoming a bigger part of the picture.
While Energy Generation and Storage accounts for a relatively small piece of the overall sales picture right now, the segment's gross-profit margin of 12% in Q4 was up from negative 7.4% in the prior-year quarter, and it's possible that will become a much bigger earnings driver over the long term. With Tesla's Energy Generation and Storage segment growing more than 90% year over year and reaching over $1.31 billion in fourth-quarter sales, it could overtake Services and Other as the company's second-biggest segment this year.
While the Services and Other segment, which houses the company's charging business, repairs, merchandise, and other offerings, posted a gross margin of just 5.6% in the fourth quarter, it has avenues to improve profitability. For example, advances in autonomous vehicle technologies could also eventually make the company a major player in the robotaxi space or produce substantial licensing revenue, potentially driving big sales growth for the Services and Other segment.
In terms of gross profits and overall net income, Tesla is basically just a car company right now, but that does have the potential to change over time. If some of these other bets pay off, they could create huge positive catalysts for the stock.
The valuation profile comes with some risk
While the stock trades down more than half from its high, Tesla still has a highly growth-dependent valuation. The company's high-quality products and substantial advantages conferred by its first-mover status helped it dominate its corner of the auto market, but the industry remains highly competitive, and potential commodification in the EV space remains a risk factor.
NASDAQ: TSLA
Key Data Points
With a market cap of roughly $618 billion, Tesla already stands as the world's eighth-largest company, and it's valued at approximately 48 times this year's expected earnings and 5.9 times expected sales. The EV leader's sales growth and profit margins are the envy of the broader auto industry and certainly warrant a valuation premium, but the market will continue to become increasingly competitive, and there's some uncertainty as to how the industry landscape will evolve in the coming years.
Tesla isn't a low-risk stock, but its best days could still be ahead
Tesla is a great company with multiple avenues to delivering strong growth down the line. On the other hand, the company already has a massive market capitalization, and the stock should probably be approached as a high-risk, high-reward investment. The company's business strengths and long-term expansion opportunities open the door for investors with above-average risk tolerance to see returns that help them achieve millionaire status, but you should consider your personal appetite for risk before going all in on the stock.
