The 2022 bear market has created a great opportunity for investors to scoop up top stocks at a discount, and Tesla (TSLA -1.11%) is not an exception. While shares in the legendary electric automaker have risen substantially in 2023, they are still down 49% over the last 12 months. Let's explore why the bull run might just be getting started.
What went wrong for Tesla?
While no single factor can explain Tesla's substantial decline last year, some things stand out. For starters, many investors were unnerved by Elon Musk, whose acquisition of social media company Twitter led him to unload Tesla shares and possibly get distracted from his role as its CEO. Market participants also began to fear that rising competition in the EV industry would crush Tesla's growth and margins.
The good news is that both of these concerns look overblown. Five months into Musk's Twitter acquisition, Tesla has shown no signs of losing its strategic vision. No longer a fragile growth company, it is also less dependent on the guidance of a single individual and has had plenty of time to build a talented management structure aside from Musk. The company also isn't letting competition hold it back.
Flexing scale and pricing power
While competition is heating up in the EV industry (leading Tesla to slash its car prices by around 20% globally), this is an opportunity for the automaker to lean into its natural advantages in scale and high margins to outcompete its rivals. So far, so good. First-quarter deliveries surged 36% year over year to 422,875 cars, which is ahead of expectations. And while some analysts expect the lower prices to hurt margins, this is a small price to pay to capture market share and possibly drive unprofitable rivals out of the industry.
Further, Tesla believes it can reduce production costs on its next-generation vehicles by half, which would help offset the price cuts over the long term and help the company maintain its profitability.
Image source: Getty Images.
Tesla is already very profitable compared to its pure-play EV rivals. In 2022, the company generated an operating profit of $13.7 billion (a margin of 17%), while rivals Rivian and Lucid generated operating losses of $6.9 billion and $2.6 billion in the same period.
It's hard to see how these companies can keep up with Tesla's pricing power because they lack its economies of scale and manufacturing innovations. Musk warns that both rivals are "tracking toward bankruptcy" unless they make dramatic efforts to cut costs.
No more crazy overvaluation
Tesla stock has come a long way from its overvalued past in 2020 and 2021 when it boasted a price-to-earnings (P/E) ratio as high as 1,120 and a market capitalization larger than the next five biggest car companies combined. And while the company's current forward P/E of 50 is double the Nasdaq-100 index's average of 26, the premium looks justified by its healthy growth rate and sustainable competitive advantages.
Investors still have a chance to buy the dip on shares of this electric vehicle leader.
