Tesla (TSLA -0.23%) has undoubtedly been one of the best investments to have owned in the past decade. Since July 2013, the stock is up a ridiculous 3,150%, crushing the performance of the Nasdaq Composite Index by an incredibly wide margin.
Even in 2023, shares are up a whopping 121%, as investors are warming up to this electric vehicle (EV) maker. If you've been sitting on the sidelines, maybe it's time to finally get in the driver's seat.
With that being said, is it a good idea to buy Tesla stock right now? Let's take a closer look at this widely followed company.
Competitive advantages
Warren Buffett, who many consider to be the best investor of all time, tries to identify companies that have competitive advantages. These are attributes that allow a business to outcompete its rivals and generate better financials. Tesla has two main factors working in its favor.
For starters, the business has developed a strong luxury brand in the auto industry. An impressive 60% of EVs sold in the U.S. are Tesla models -- market share that has contributed to the brand's standing. And according to Brand Finance, Tesla's brand is worth an estimated $66 billion, more than any other competitor.
Just look at the company's gross margin of 28.5% on its cars sold in 2022. Customers are clearly willing to pay a premium for what they deem to be a superior product. Offering some of the longest ranges among EVs, as well as cool features like over-the-air updates and Dog Mode, can resonate with people.
It's also hard to deny founder and CEO Elon Musk's effect on keeping the brand relevant. Shareholders can view this in a negative or a positive light. But what he's done by shaking up an old industry is commendable.
Tesla also benefits from economies of scale. Between 2017 and 2022, Tesla's auto sales surged 691% to total $67.2 billion. And last year, the business produced 1.4 million vehicles, while shipping 1.3 million. That is massive scale. The benefit to a company like Tesla, one that has sizable fixed expenses primarily when it comes to manufacturing plants, is that it can better leverage these operating costs as revenue grows.
This isn't more evident than in Tesla's net profits. Last year, Tesla produced net income of $12.6 billion, translating to a margin of 15.5%. Just two years prior in 2020, the business generated a net margin of 2.9%. This is clearly proof that Tesla is scaling extremely well.
Traditional auto companies, like Ford and General Motors, are investing heavily in their own EV capabilities. But because they don't sell nearly as many units as Tesla does, these EV segments are losing money. It's anyone's guess when, or if, they will ever become profitable like Tesla.
What matters to you?
It's hard to argue with Tesla's disruptive potential, bringing EVs to the masses and pioneering an entirely new segment within the overall auto sector. The company's head start and first-mover advantage against the major legacy automotive manufacturers has resulted in a powerful luxury brand known for innovation and sleek designs. Moreover, Tesla's size allows it to benefit from economies of scale. These competitive advantages exemplify Tesla's attractive qualitative characteristics.
On the other hand, how much are investors willing to pay for these positive attributes? Tesla's valuation leaves no margin of safety, as it appears the optimism is fully priced in. Shares currently trade at a hefty price-to-earnings ratio of 80 and a price-to-sales multiple of 11. Even consdering its growth prospects, the valuation is a key reason why I'm passing on the stock right now.
For investors who care less about these ratios and more about Tesla's economic moat, perhaps initiating a small position in the stock makes sense.
