Tesla's (TSLA -0.95%) stock has been on fire lately. After hitting a 12-month low of $102, the stock is now up by more than 150% to $261.
Investors who missed buying the stock on the cheap may wonder whether they should jump in today. That's not going to be an easy decision. Let's take a closer look.
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Tesla's near term could be challenging
Tesla has been a star in recent years as it rides the electric-vehicle (EV) trend.
It delivered its first profitable year in 2020 and outperformed that result in the next two years. Sales volume, revenue, and net profit reached record highs in 2021. And before investors got over Tesla's 2021 performance, the company delivered another 51% revenue increase and a 128% growth in net profit in 2022.
But as it entered 2023, there were early signs that it may face challenges in the coming quarters, as consumers struggle with high inflation and high interest rates. With lower discretionary income thanks to inflation and increasingly more challenges in getting loans, consumers will naturally postpone their car purchases.
Moreover, while Tesla used to be the only game in town, that's no longer the case. In the U.S., it faces competition from incumbents such as General Motors and Ford; overseas, it has to compete with the likes of BYD and Volkswagen. With competition, consumers have more choices and better bargaining power, which generally results in pricing pressure. Thar trend is likely to intensify in the coming months.
Tesla's recent performance confirmed some of these concerns. In the first quarter of 2023, revenue, operating margin, and net profit weakened compared with the fourth quarter of 2022.
Still, the long-term prospects look bright
Tesla may be facing challenges, but it's not sitting idle.
One of the most significant moves Tesla has taken lately is reducing its car pricing locally and overseas. The idea is that by making its cars more affordable, the company can grow its volume to increase market share. With more sales, Tesla can reduce its unit production cost, giving it a cost advantage over the other automakers.
Tesla can use its cost advantage to gain long-term strategic benefits. For example, it could price its cars very low to outsell its competitors and gain market share during an economic downturn. With more vehicles on the road, Tesla can improve its unit production cost even more, leading to potenitally higher profit, and collect more data to improve its products -- think autonomous driving.
And thanks to its industry-leading operating margin of 16.8% in 2022, compared with the industry average of around 8%, Tesla is well positioned to execute its price-cutting strategy to fend off competitors. If well executed, this strategy can help maintain Tesla's EV market share, if not expand it, in an economic downturn.
But that's not all. Tesla has positioned itself to ride other mega-tailwinds, such as renewable energy, robotics, and autonomous vehicles. While it's unrealistic to expect the company to do well in every area, it is possible that it can become an essential player in some of these emerging industries. In other words, there is enormous optionality for Tesla's investors.
And with its rock-solid balance sheet of $22.4 billion in cash, cash equivalents, and investments, Tesla has all the firepower it needs to invest in these moonshot projects.
Here's the deal-breaker
Tesla is likely to face a challenging time in the coming quarters as it navigates the increasingly difficult macro environment and executes its price-cutting strategy -- probably leading to lower profit.
Still, I'm optimistic about the company's long-term prospects for riding on megatrends like the switch to EVs, autonomous vehicles, renewable energy, robotics, and more. And with Elon Musk at the helm, Tesla has a good shot at executing its projects in these areas.
But having said that, I won't buy the stock at today's valuation. At a price-to-sales ratio of 10.5, Tesla's stock is too rich for my risk appetite. Comparatively, Ford has a P/S ratio of 0.4 . A slight hiccup in its execution or a deterioration in the economic condition could result in a massive decline in Tesla's stock price.
