It has been a fantastic year to be a Tesla (TSLA -1.11%) shareholder. Even though shares are off 41% from their peak price, they're up 95% in 2023 (as of June 26). This performance crushes the 27% gain for the Nasdaq Composite Index. And it's a clear indication that investors are starting to feel more optimism about the direction of the business.
But for those who have been on the sidelines, is Tesla stock a buy today? Let's dive deeper to understand what's happening with this top electric vehicle (EV) maker.
Looking at the latest numbers
One thing stands out when you look at the company's latest financial results, and that's the drastic slowdown in revenue growth. In the first three months of 2023, total revenue of $23.3 billion was up 24% year over year. This gain is impressive, but it is the fourth straight quarter that this metric has decelerated.
Nonetheless, Tesla was able to produce 441,000 units (up 44% versus a year ago) and deliver 423,000 (up 36%).
Going down the income statement, another worrying trend is that margins are under pressure. In 2022, Tesla's operating margin was 16.8%. During the first quarter, it shrunk to 11.4%. Management said the business is paying more for things like raw materials, commodities, and logistics.
Every investor has been thinking more about the macroeconomic situation and how it can affect their portfolios. For an automaker like Tesla, inflationary pressures hurt the spending power of consumers.
Adding fuel to the fire are higher interest rates, which make a new car less affordable. "It is worth pointing out that the current macro environment remains uncertain," CEO Elon Musk said on the first-quarter 2023 earnings call.
Favorable characteristics
While it's extremely easy to get caught up in a single quarter's results, investors will gain a better perspective by zooming out and focusing on the bigger picture with Tesla. According to Statista, it has the top market share in terms of EV volume, thanks in large part to its huge first-mover advantage versus older rivals in the industry.
And recent cuts in retail prices for its vehicles, in order to drive greater volume and grow market share, might prove to be the wise decision for Tesla's long-term prospects.
Despite recent troubles, shareholders can appreciate the company's improving financials over time. Between 2017 and 2022, the business saw its operating margin improve from a negative 0.3% to 16.8%. As Tesla gets larger, it is clearly proving that it can leverage its fixed costs.
Capital expenditures are high, as they should be, because the company continues to invest in expanding its manufacturing capabilities. But it generates lots of free cash flow. And as of March 31, the business had $22.4 billion of cash, cash equivalents, and investments compared to just $2.7 billion of debt on the balance sheet.
Besides introducing new models (production for the highly anticipated Cybertruck is expected to start later this year), Tesla is looking to expand into new markets. Musk recently met with India's prime minister, Narendra Modi, to discuss plans to finally launch production in the world's most populated country.
Looking even further ahead, the boost from the potential of its renewable energy ambitions and ongoing push toward autonomous vehicles could bring about even more growth for the company.
What about the valuation?
Over the past decade, shares of Tesla have skyrocketed an incredible 3,400%, easily making it one of the best investments during that time. Even in the last five years, the stock has risen almost 11-fold. Any investor would have loved to have this business in their portfolio.
Even with shares still well off their all-time high, they now trade at a price-to-earnings (P/E) ratio of 71. This is very expensive when compared to mass-market competitors like Ford and General Motors, as well as a luxury automaker like Ferrari. But Tesla's current P/E multiple is significantly below its historical average.
When looking at Tesla's positives, that valuation might be compelling for some. However, I still view the stock as overvalued at this point, so it could be a good idea to simply add it to your watch list for now.
