Tesla (TSLA 0.66%) has been on a tear, with its stock price roughly doubling since the start of 2023. Investors have reacted positively toward macroeconomic tailwinds and continued top-line growth. That said, a high valuation and rising competition are potential challenges for the automaker. Let's weigh the pros and cons of investing in the stock.
Has the rally already ended?
While Tesla's shares are booming on a year-to-date basis, they have given up some gains following weaker-than-expected second-quarter earnings. The results, reported on July 19, were great from a top-line perspective. Revenue rocketed 47% year over year, driven by continued growth in vehicle production and delivery (up a whopping 83%). But many investors may have been disappointed by the bottom line.
While Tesla's revenue increased sharply, this did not translate to improved profitability. Income from operations fell 3% to $2.4 billion, driven by rising competition in the electric vehicle (EV) industry, which is pressuring Tesla and other automakers to slash prices.
For Tesla, these challenges have been most intense in China, where a plethora of low-cost options are giving the American automaker a run for its money. In August, management slashed Chinese Model S and Model X prices by 6.9%. And this follows the launch of lower-range versions of both cars in the U.S. market for $10,000 less than the regular model. The price cuts mean Tesla's margins could continue to decline in the near term, but investors should keep a long-term perspective.
Tesla's long-term future still looks bright
While EVs are rapidly gaining mainstream acceptance, the industry is still in its infancy -- representing just 14% of new cars sold globally in 2022, according to the International Energy Agency. This percentage is expected to surge to more than half of new car sales by 2035 as governments globally push to reduce carbon emissions. Against this backdrop, it simply makes less sense for Tesla to prioritize near-term profits over its long-term market share.
Image source: Getty Images.
Tesla's industry-leading profitability gives it a huge advantage in price wars. According to data from Reuters, the company earns more per vehicle sold than any of its global rivals (with many EV makers still generating net losses on every sale). This advantage will allow Tesla to keep prices lower for longer, possibly driving some less well-capitalized rivals out of business and maximizing its long-term market share as the industry matures.
The company's growing economies of scale and investments in battery technology can help it keep up the pressure on its competition. And management says it has plans to slash the production costs of its next-generation vehicles by 50%, which could give further room for price cuts should it achieve this incredible feat.
Is Tesla stock still a buy?
With a forward price-to-earnings (P/E) multiple of 63, Tesla stock is still expensive compared to the S&P 500 average of 25. And investors are right to be a little worried if price competition keeps profit growth muted in the near term. With that said, Tesla's top line continues to expand at a relentless pace, and its long-term potential to dominate the mass market for EVs remains intact.
