Electric vehicle company Tesla (TSLA 5.77%) is currently sitting pretty. The company is slashing prices to take market share at a time when labor strikes threaten to push the manufacturing costs of domestic competitors like Ford and General Motors higher.
Tesla's stock has also done well; shares have roughly doubled in price over the past 12 months, which raises the question whether investors should continue buying today or hold off.
While Tesla's long-term future looks bright, there are good reasons to stay patient and wait for a better entry point.
Here they are.
Shares have gotten hot after an exciting run
Sometimes, timing plays a significant role in investing outcomes. Investors who bought Tesla stock precisely one year ago are down by 10% on their purchase price today. However, had you waited a few months and bought in January, you would have doubled your money by now! In other words, 2023 has been remarkably kind to Tesla investors.
But there comes a point when the share price outruns the company's operating performance, and we could be at that point. The surge in Tesla stock has also lifted its valuation over the past nine months:
The stock's forward P/E ratio has more than doubled from 32 to 72. Analyst estimates for Tesla's long-term earnings growth haven't changed much, so its PEG ratio has increased from approximately 1.3 to 3. In other words, the stock is far more expensive now for its expected growth rate. While Tesla is a great business, the stock might not be an excellent investment if you wildly overpay to own it.
The short-term outlook is a bit cloudy
Tesla has a lot of room to expand its business over the coming years, but the short term could get a bit bumpy. For starters, the U.S. consumer continues to digest a soaring cost of living. Housing and rent prices keep rising, and Americans have more debt than ever. It's not a huge leap to question the consumer's appetite for new vehicles, considering they cost tens of thousands of dollars.
Even with price cuts, it costs at least $40,000 upfront for a Tesla Model 3, so these vehicles are undoubtedly big-ticket items for most consumers. Tesla's inventory levels have also risen sharply over the past few years, nearly tripling to over $14 billion worth:
TSLA Inventories (Quarterly) data by YCharts.
Hesitant consumers and high inventory could create a need for further price cuts, which may move vehicles but will further pressure profit margins. Tesla's vehicle sales pay the bills, even if the company is far more than an automotive business. Tightening consumer wallets could be a short-term challenge, which doesn't help when the stock's valuation has already shot higher since January.
Cybertruck ramp-up could take time
There were roughly 2 million Cybertrucks on order earlier this summer, which signals that Tesla's newest vehicle could be a huge growth catalyst for the company moving forward. But just like Tesla's previous products, ramping up manufacturing volume takes time. Tesla reportedly told suppliers its goal is to produce 375,000 units annually, but that could be a way off.
After all, Tesla originally wanted to begin Cybertruck production in late 2021 and built its first production unit in July of this year. Tesla's notorious for slipping timelines, but the result could be worth the wait. There seems to be plenty of demand for Cybertruck deliveries to ramp up as quickly as production can manage.
So, what's the takeaway? Tesla must navigate internal and external challenges, fighting higher inventory levels in an economy where consumers might pull back on expensive purchases. Additionally, Cybertruck production could be a journey itself over the coming years. These question marks, coupled with a much more expensive stock today, should have investors considering a lower entry point to add this proven winner to their portfolios.
