As one of the most valuable and innovative businesses in the world, Tesla (TSLA -1.11%) never really gets to spend time outside the spotlight. So, when it reported disappointing fourth-quarter and 2023 financial results on Jan. 24, the market's negative reaction made headlines.
Shares fell 12% the following day and they are down 24% year-to-date. This is an unfavorable trend given that the Nasdaq Composite has climbed 6% so far this year.
While they take a breather, is now the right time to buy shares of this leading electric vehicle (EV) maker?
The struggles continue
If you zoom out over the past decade, it's hard not to get excited about Tesla's spectacular growth. Revenue has soared from $2 billion to $97 billion and the stock is up more than 1,300%. The business deserves credit for introducing stylish, technologically advanced, and (somewhat) affordable EVs to a broader audience. Success spurred other auto makers to invest heavily in these types of cars.
But last year was one that shareholders are hoping to forget. Yes, the stock doubled in 2023, but that covers up trends with the underlying business.
In the fourth quarter, revenue increased by just 3%, bringing full-year sales growth to 19%. That marks a notable slowdown from prior years. Tesla is also taking it on the chin when it comes to profitability. Both the gross margin and the operating margin contracted significantly in 2023.
Elon Musk, Tesla's outspoken founder and CEO, is right to blame the macroeconomic environment for his company's struggles. In particular, higher interest rates might make consumers think twice before buying a new car. And this isn't a positive development when the U.S. is still dealing with inflationary pressures. So, Tesla was forced to cut prices.
Tighter macro conditions over the next several years might be the new normal.
Paying a premium for promises
Although Tesla shares currently sit 54% below their all-time high from November 2021, they still look expensive. At a price-to-earnings ratio of 43.5, Tesla benefits from being a "story stock."
Tesla has yet to achieve fully autonomous driving capabilities, which involve no human intervention. The hope is that this breakthrough, if it happens, can help Tesla operate a global fleet of self-driving taxis. Well-known tech investor Cathie Wood is bullish on the revenue potential for robotaxis over the long term.
Robotics are another area that Tesla could be a leader in. Maybe you've seen pictures of Optimus, the company's humanoid robot that it hopes can boost car production capabilities on the factory floor. Musk wants to sell these robots to other businesses.
"It's by far the most sophisticated humanoid robot that's being developed anywhere in the world," Musk said on the company's Q4 2023 earnings call. "I think we've got a good chance of shipping some number of Optimus units next year."
Maybe a less ambitious strategy, Musk says Tesla is working on a cheaper vehicle to add to its lineup, with a price tag of $25,000. There's no question that this would appeal to a mass consumer base. The goal is to introduce this in 2025, but based on the company's track record, I wouldn't be surprised if the launch is delayed.
If you believe these things will one day become a reality, then perhaps buying the stock is a no-brainer decision for you. Hope of hitting these goals, with the accompanying much higher revenue and earnings down the line, is the only reason that justifies paying this valuation.
If you have more tempered expectations, like I do, it's probably a smart move to pass on the shares for now. The volatile nature of the stock market should present better buying opportunities in the future.
