With its shares up by a whopping 121% year to date, Tesla (TSLA 0.66%) has been one of 2023's big winners, convincingly bouncing back from a difficult 2022 marred by production issues and its CEO Elon Musk's controversial acquisition of Twitter. That said, Tesla still faces challenges as it seeks to cement its leadership in the electric vehicle (EV) industry. Let's dig deeper to find out if the stock is a buy in December and beyond.
Third-quarter earnings highlight near-term challenges.
Tesla's third-quarter earnings highlight macroeconomic challenges and rising competition in the EV industry. The company's automotive revenue increased by only 5% year over year to $19.63 billion -- a sharp deacceleration from the 46% growth rate recorded in the preceding quarter. And income from operations more than halved to $1.76 billion.
CEO Elon Musk attributes the top-line weakness to high interest rates, which make it harder for consumers to finance and purchase cars. The good news is that this problem is temporary and will likely ease when the Fed relaxes its tightening cycle. Fixing Tesla's bottom line will be a more challenging effort. But it could create significant shareholder value.
Tesla is using the price war to cement its long-term EV market share. According to Reuters, the automaker is working on producing a sub-$27,000 vehicle at its factory in Berlin, Germany. If actualized, this would be a dramatic price reduction from Tesla's current cheapest car, the Model 3 Sedan, which starts at around $38,990, according to CarFax. Tesla is finally making good on its pledge to halve prices on its next-generation vehicles by unlocking manufacturing efficiencies to lower production costs, which could boost growth and margins.
Don't forget about the other growth drivers
Tesla's future may depend on more than just cars. In the third quarter, sales in its energy generation and storage segment jumped 40% to $1.56 billion on the popularity of its battery-storage systems for commercial and home clients. And while energy storage is still a secondary business for Tesla, management is investing in its continued growth. In April, the company announced plans for a new Megapack battery factory in Shanghai, China designed to dramatically increase production volume.
Image source: Getty Images.
Tesla's artificial intelligence (AI) potential (which is centered around self-driving car software) is also impressive, with Morgan Stanley analyst Adam Jonas optimistically projecting that it could add $600 billion to the company's market cap through services like robotaxis. But even if these lofty claims don't come to fruition, Tesla's self-driving program will almost certainly boost its economic moat by adding functionality to its cars that rivals could struggle to replicate.
Navigating the valuation
Despite all the good things going for Tesla, the company's valuation is once again getting uncomfortably high. With a forward price-to-earnings (P/E) multiple of 66, shares are more than double the S&P 500 average of 25 mainly because the price war is clobbering its bottom line. But high valuations are nothing new for Tesla, and sometimes the best quality companies trade for significant premiums because of their potential.
For Tesla investors, it makes sense to focus on the long term, giving time for the automaker's next-generation vehicles to bring production costs down (and margins up) while new-growth drivers like energy storage and artificial intelligence possibly unlock a new leg of expansion.
