Thanks in part to a resurgence of stocks in 2023, Tesla (TSLA +0.91%) has seen its shares skyrocket this year. Boosting this performance were the company's better-than-expected financial results in each of the last two quarters.
Even with a roughly $800 billion market capitalization, Tesla shares are still off 38% from their peak price set in November 2021. Now could be an opportune time to take a closer look at this industry-leading enterprise.
Is this top electric vehicle (EV) stock a buy? Let's consider some important recent developments, as well as bigger-picture items, before coming to a conclusion.
Near-term challenges
In the second quarter (ended June 30), Tesla's revenue of $24.9 billion represented a 47% year-over-year gain. This growth is certainly impressive, but it's a slowdown from the gains the business was posting in previous years. For example, in 2021 and 2022, Tesla's sales jumped 71% and 51%, respectively. Macroeconomic headwinds, particularly higher interest rates, get a lot of the blame here.
While Tesla deserves credit for essentially spearheading the adoption of EVs and bringing them to the mainstream, there's intense competition nowadays. It battles with legacy auto manufacturers like Ford Motor and General Motors, as well as younger start-up companies like Rivian Automotive and Lucid Group. The path forward won't be nearly as easy as it was in the past decade, as consumers are now flush with options when choosing what EV to buy.
A crowded marketplace has resulted in pressured profitability, and Tesla's Q2 gross margin of 18.2% and operating margin of 9.6% were down substantially compared to the year-ago period. Pricing wars in the U.S. and in China are in full swing, and Tesla is aggressively playing this game in order to increase its market share.
NASDAQ: TSLA
Key Data Points
Long-term optimism
Unsurprisingly, founder and CEO Elon Musk's optimism surrounding his company's outlook hasn't changed. He gets that lower margins are obviously not what shareholders want to see, as they could be a sign that things are trending in the wrong direction. That worry is valid.
However, Musk urges investors to adopt a long-term mindset with the business. The ultimate goal is still to introduce full self-driving (FSD) functionality to its EVs. And should this promise actually become a reality, Tesla's margins could be astronomically higher than they currently are.
With this game-changing technology ready to be deployed, Tesla could operate a global fleet of EV robotaxis that are completely autonomous. This would transition what has so far been a major cost center, including investments in top tech talent and artificial intelligence initiatives, into a massive money-making machine. The hope is that Tesla's FSD software will be able to generate outsized profits for the business.
Things to keep in mind
Despite declining profitability that is worrying investors right now, the bigger picture for Tesla is certainly worth paying attention to as well. Thanks to Elon Musk's execution thus far, coupled with his disruptive vision, the business has so much optionality. Consequently, I don't think it's crazy to believe that Tesla's market cap could double or triple in the next five to 10 years should it achieve its lofty goals.
"I strongly believe Tesla is an epic long-term investment, and don't sweat it when, you know, things go up and down," Musk said on the Q2 2023 earnings call.
But with the stock's current price-to-earnings ratio of 71, investors need to believe that the company will be able to introduce FSD capabilities sooner rather than later, and that this breakthrough will lead to outsized profitability gains. This has to be a key part of the investing thesis if you're comfortably buying shares at today's steep valuation.
Nonetheless, the uncertainty around this remains high, so perhaps it's best to allocate a tiny portion of your portfolio to Tesla stock if you're bullish.
