Over the trailing decade, few companies have outperformed quite like North America's leading electric-vehicle (EV) maker Tesla (TSLA 3.39%). As of the closing bell on Dec. 5, shares of the largest automaker by market cap had risen by nearly 2,500% from where they stood 10 years ago. Further, they're higher by 94% year to date.
But as Wall Street's most-famous disclaimer goes, "Past performance is no guarantee of future results."
Though it can be entertaining to look back at eye-popping performances, what matters most is where Tesla stock is headed in 2024 (and beyond). Thus, the all-important question is: Does Tesla stock remain a buy, even after a 94% year-to-date gain?
In order to answer this question, you first have to understand the catalysts that fueled Tesla's outperformance, as well as examine the drivers and pitfalls that may lie ahead for the world's largest automaker.
All eyes are on Cybertruck as deliveries begin. Image source: Tesla.
Investors stomped the accelerator on Tesla stock in 2023
Tesla's stark outperformance of the broader market has been driven by four factors.
To start, China halted its stringent COVID-19 mitigation measures in December 2022. China's attempts to stop the spread of COVID-19 led to strict and unpredictable lockdowns that adversely impacted supply chains and consumer purchasing power. With these measures now abandoned, the world's No. 2 economy -- and more importantly, the global No. 1 auto market -- is free to resume its steady expansion. Tesla should be a major player in China's still nascent but rapidly growing EV market.
Secondly, investors have been pleased with the company's production expansion and recurring profitability. Tesla appears to be on track to hit its target of 1.8 million EVs produced in 2023, and its four gigafactories give the company a pathway to top 2 million EVs in the coming year.
Likewise, Tesla is the only pure-play EV company that's generating a recurring profit, based on generally accepted accounting principles (GAAP). Although legacy automakers are quite profitable, their individual EV segments continue to lose money. Tesla is working on its fourth consecutive year of GAAP profits.
Investors have also been excited about the long-awaited rollout of the Cybertruck, with deliveries of the next-gen electric truck commencing a little over a week ago. When unveiled in 2019, Tesla quickly secured approximately 250,000 reservations. But by 2021, the number of Cybertruck reservations had surpassed 1 million. Investors view this fifth mass-produced model as Tesla's next growth driver and product differentiator.
Fourth and finally, psychology likely played a role in Tesla's stellar year. The fear of missing out, commonly referred to as FOMO, encouraged professional and everyday investors to pile into Wall Street's largest and most-trusted companies in 2023. The "Magnificent Seven," of which Tesla is a member, are responsible for the bulk of the gains in the benchmark S&P 500 this year.
What's on tap for Tesla in 2024?
Now that you have a better idea of what sent Tesla's market cap higher by more than $350 billion in 2023, let's take a closer look at the catalysts Wall Street and investors will undoubtedly be paying attention to in 2024.
At the top of the list has to be the ongoing rollout of the Cybertruck. With both production and deliveries expected to rapidly expand next year, the big question to be answered is: How many reserved Cybertrucks will turn into full-fledged sales? If Tesla runs into assembly line snafus or reservations fail to translate into actual deliveries, the world's largest automaker could struggle.
Another extremely important catalyst for 2024 is Tesla's operating margin. The company kicked off a price war with other EV manufacturers earlier this year, which has resulted in more than a half-dozen price cuts for its four major production models (3, S, X, and Y). Over the trailing year, ended Sept. 30, Tesla's operating margin has nosedived from 17.2% to 7.6%. Investors are going to want to see whether this slide stabilizes, or if Tesla's operating margin comes under further pressure.
To build on this, Wall Street is sure to pay close attention to sales of the company's flagship sedan, the Model 3, in the first half of 2024. Beginning Jan. 1, changes in the Inflation Reduction Act will halve the EV tax credits for the rear-wheel-drive Model 3 and long-range Model 3 to $3,750 from $7,500. It's possible a reduction in EV tax credits could make the Model 3 less appealing to cost-conscious consumers.
Many eyes are going to be focused on Tesla's ancillary energy segments as well. Energy Generation, Storage, and Services are, collectively, generating a gross profit. Ongoing efforts to make Tesla into more than just a car company will be viewed favorably by Wall Street and investors.
Lastly, the company's valuation will take precedence. Tesla is aggressively valued, a reflection of its first-mover advantages in the EV industry, as well as the expectation that it'll meaningfully outpace other automakers in the key performance metrics that matter, such as operating margin and cash flow.
Image source: Getty Images.
Is Tesla a stock to consider buying?
After adjusting the rearview mirror and setting your sights on what matters in 2024, it's time to circle back to the question at hand: With Tesla stock up 94% in 2023, is it still worth buying?
My answer: Absolutely not.
I'm happy to give credit where credit is due. It's the clear EV market share leader in North America and shouldn't have any trouble delivering its fourth consecutive year of GAAP profits in 2023. But there are plenty of reasons to be skeptical of Tesla stock in 2024.
To start with, the company's operating margin decline is a huge red flag. CEO Elon Musk noted during the company's annual shareholder meeting in May that his company's pricing strategy is dictated by demand. The simple fact that more than a half-dozen price cuts have been enacted since the year began signals that EV demand is weak and inventory levels continue to rise. Tesla's days of supply -- new-car ending inventory divided by a relevant quarter's deliveries -- has jumped from three days to 16 days over the past two years.
The halving of EV tax credits for select Model 3's because of battery sourcing requirements won't help Tesla, either. In other words, I fully expect Tesla's operating margin to face additional pressure in 2024.
Tesla's valuation is another clear problem. Even though the company's sales are rapidly growing, its operating margin is no better than legacy automakers. To add, its ancillary segments are generating low margins. Tesla's profitability is almost entirely dependent on selling and leasing EVs -- and that part of the company's operating model is struggling, as evidenced by its operating margin. A forward price-to-earnings ratio of 62 simply can't be justified.
However, the top reason to avoid Tesla in 2024 is its CEO. Though Elon Musk is a visionary, he's also a polarizing individual. He's caught the attention of securities regulators on more than one occasion and, more importantly, has made a veritable mountain of promises on the innovation front that haven't been kept. If these unfulfilled promises are backed out of Tesla's valuation, there would be significant downside to come.
