It seems as though Elon Musk, Tesla's (TSLA 0.66%) visionary founder and CEO, is always making headlines for one reason or another.
Despite what you think about him, though, Tesla's stock has been one of the biggest winners in recent memory.
But do shares make for a smart investment right now? Let's look at the electric vehicle (EV) business through three lenses to come to a sound conclusion.
Economic moat
Many investors have probably heard the term economic moat from Warren Buffett. His investing philosophy, which has clearly been successful, is to only own businesses that have this important characteristic.
Does Tesla have an economic moat? I think it does. And I believe two factors contribute.
The first aspect is Tesla's brand. According to Interbrand, Tesla's brand value is $50 billion by itself. This makes it the 12th most valuable in the world of any company.
Tesla's powerful standing among consumers has benefited the business from a financial perspective. In the past three years, the company's gross margin, a quantitative measure of the ability and willingness of customers to pay for its vehicles, has averaged 23%. For comparison's sake, Ford's and General Motors' gross margins have averaged less than 15% during the same time.
Tesla is almost synonymous with the EV industry. And this helps it stand out among the competition.
I'd also point out that the business benefits from a meaningful cost advantage. Tesla has focused relentlessly on building out its manufacturing capabilities so that it can more efficiently develop cars. This strategy is paying dividends. While nearly all other EV makers struggle to achieve profitability, Tesla has been in the black since 2020.
Over time, as Tesla continues scaling up, this cost advantage should only become more pronounced.
Growth prospects
Tesla shares have been a huge winner for investors mainly due to the company's incredible growth. But one thing is certain: It will be more difficult for Tesla to achieve the rapid growth that it did in the past in the years ahead.
That's because competition in the EV industry will only get more intense. Legacy automakers, as well as EV upstarts, are all vying for a piece of what is a truly massive market. Tesla must be on top of its game to continue posting solid gains.
This brings me to my next point. There's the possibility that interest rates will stay at higher levels than they've been at for the last 10 years. The result is that purchasing a new vehicle becomes less affordable for consumers, providing a potential headwind for Tesla and its competitors.
To help alleviate macro headwinds, the business has been aggressively cutting prices for its vehicles, a move that has pressured margins. But investors don't want this to be the new normal.
In 2022, sales of EV units represented just 6% of the total for new cars. There is a long expansionary runway for Tesla to continue penetrating in the decades ahead.
Valuation analysis
The presence of an economic moat, as well as growth potential in the EV industry, might nudge some investors into owning Tesla stock.
On the other hand, the recent challenges facing the business point to how dependent Tesla is on a favorable macroeconomic backdrop, particularly related to interest rates.
The analysis isn't complete without finally considering Tesla's valuation. As of this writing, the stock trades at a price-to-earnings ratio of 78. In fact, this multiple has doubled since the start of the year, indicating how optimistic the market has become.
Tesla's valuation is expensive and likely prices in the lofty expectations that investors have about the company's long-term ambitions and Elon Musk's capabilities. At the end of the day, this is a story stock, so it might never trade at an attractive P/E multiple.
That's fine with me. I'm completely OK with passing on the shares.
There are certainly reasons to like this business, which I touched on above. But I think the chances of market-beating returns are slim at these levels.
