Stocks and volatility go together like peanut butter and jelly; it's just the cost of entering the arena. Even the market's biggest winners, like electric vehicle (EV) and technology company Tesla (TSLA 3.06%), aren't immune.
Over just the past three years, Tesla has hit a new high -- only to fall at least 25% three times, including a 75% drop that it's still recovering from. Warren Buffett's right-hand man, Charlie Munger, once said investors should expect mediocre results if they can't stomach the occasional 50% decline.
Tesla shares are still 36% off their former high but have rallied an impressive 112% so far this year. Is the stock on its way to reaching a new peak, or should investors stay away after seeing the share price double in a matter of months?
Here is the good news ...
When evaluating Tesla, investors often compare the EV maker to other automotive companies like Ford or General Motors, but that's arguably a flawed comparison. Sure, they all make vehicles -- a capital-intensive and competitive endeavor. You can see below how the numbers stack up, and yes, Tesla is seemingly good at making them. Despite bringing in just half the revenue of legacy brands, Tesla is outproducing them in free cash flow and growing its top line faster.
Data by YCharts.
But Tesla shines in its positioning within so many potential growth markets. For example, EVs are increasingly likely to become the industry's future -- and Tesla essentially made them mainstream in the United States. It's the world's battery-electric vehicle (BEV) leader by a sizable margin. That's without factoring in emerging vehicle models such as Cybertruck and Tesla Semi. Ford and General Motors will even pay Tesla to access its charging network -- easy money for Tesla.
Additionally, Tesla has taken root in other high-potential markets over the next decade, including its well-known autonomous driving ambitions, green energy and storage, artificial intelligence, and robotics. Few companies have so much going on. No, it might not all work out, but Tesla's multiple chances at swinging the bat only increase the odds of it hitting a home run.
But there's bad news, too
It's essential to check optimism with some skepticism to keep a realistic mindset. Tesla still has a lot of long-term growth potential, but we can't shake the fact that selling expensive, big-ticket items to consumers remains its core business. People's willingness to spend money can directly affect its business, and there are some signs that Tesla could have trouble moving vehicles in the short term.
For starters, it began instituting multiple price cuts months ago, which has already started putting a dent in its operating margin. Additionally, you'll see below that inventories have steadily climbed, multiplying to $14.3 billion over the past two years.
Data by YCharts.
One could argue that this is a temporary issue, and as the economy recovers, people will resume splurging on new vehicles at some point. But with the stock rallying so hard despite this potential weakness, it's something investors should keep in mind before putting in that buy order for shares.
Is Tesla a buy today?
With all that said, investors can get a gauge of the type of value Tesla stock offers today. Analysts expect Tesla's 2023 full-year earnings per share will be around $3.50. That's a price-to-earnings ratio (P/E) of 75. Consensus estimates are also calling for Tesla to grow earnings by an average of 25% annually moving forward, which values Tesla at a price/earnings-to-growth (PEG) ratio of 3.
I generally consider anything over 1.5 to be on the pricey side, so this high ratio implies that Tesla's stock is expensive despite its strong growth outlook. Additionally, the uncertainty over profit margins, price cuts, and rising inventory could squeeze earnings growth. This possibility could weigh on the stock, leaving no margin of safety at such a steep valuation.
Tesla's long-term future looks bright, and the stock could easily be higher five or 10 years from now, but it's hard to see the stock as a good enough value today to buy shares.
