If you're looking to invest in electric vehicles (EVs), there's one glaring option available in the market: Tesla (TSLA 3.29%). While other up-and-coming EV makers and legacy companies are starting their transition to an electric fleet, Tesla still stands above its competition in terms of investment quality. It's not a perfect investment, but Tesla is still the top EV stock to buy right now. Here's why.
Its margins have been under pressure recently
Tesla is far and away the leader in the U.S. EV market. In the third quarter, over 313,000 EVs were sold, up nearly 50% from last year. Of those EVs, about half were Teslas. This shows Tesla's dominance, and a new product could widen its lead.
With Cybertruck deliveries now beginning, Tesla has another revenue stream that will be activated after investing a lot of money into its EV truck line. It could also help reverse a concerning trend for Tesla investors.
One of Tesla's biggest advantages over its legacy rivals was its gross margin. Tesla's input costs were much lower than those of its competitors, so it could produce a greater gross profit. However, now that Tesla has slashed prices to stay competitive with other options in a rising interest rate environment, its gross margin has deteriorated to the point where it's nearly in line with traditional automakers.
TSLA Gross Profit Margin (Quarterly) data by YCharts
However, some of the highest-margin vehicles for makers like General Motors and Ford Motor Company are their pickup trucks, which often have gross profits over $10,000 per vehicle. This far outweighs the margins on typical sedans, making it worth paying attention to what kind of profit margins investors can expect from the Cybertruck.
If Tesla can pull off superior margins with its truck, it will receive a much-needed gross margin boost. But even if it doesn't, having a strong pickup offering is key for competing in the U.S. market, as the top three selling vehicles so far in 2023 are the pickup lines from the Big Three in Detroit: Ram, Chevy Silverado, and the Ford F-series. Now that Tesla has a viable option, it could capture some market share as the other three introduce their EV pickups.
But even without pickups in its lineup, Tesla is still doing fine. In Q3, its production numbers were up 18%, and deliveries increased by 27%. But because of price cuts, its revenue only rose by 9% while net income declined by 44%.
Investors will need to keep an eye on prices, but if Tesla can raise prices once interest rates rise, it will clearly demonstrate whether the company has pricing power. If Tesla can exercise this practice, it will solidify the stock as a solid investment. Additionally, Tesla has the upside of full self-driving (FSD) capability on a subscription product that could bring in massive revenue once it's fully built out.
Tesla's stock is incredibly expensive
But many of those points are in the future; what about now? An investment in Tesla is an investment in the future; there's no way around it. The stock's current valuation makes no sense to investors with a short-term mindset.
TSLA PE Ratio data by YCharts
Tesla's 77 times trailing and 75 times forward earnings are incredibly high valuations to pay for any company, let alone an automaker. So if you're looking for a short-term bargain, Tesla isn't your stock.
However, if you think it can raise prices once interest rates decline, capture a chunk of the American truck market, and deploy FSD or other long-shot Tesla technologies, then the valuation makes more sense. Tesla is a five-year investment -- at minimum -- unless something drastic changes with the company.
I still think Tesla is the top EV stock in the market, but you must have a long-term mindset if you're going to invest in it.
