Tesla (TSLA 0.69%) stock had a great run in 2023, more than doubling in price from $118 to 248.
But since the start of 2024, the stock price has slumped by around 20%. So is now a good time to pick up some Tesla shares?
Tesla's near-term prospects remain unexciting
For a time, Tesla was on a multiyear winning streak. In 2019, it achieved its first-ever full year of profitability on a non-GAAP (generally accepted accounting principles) basis. The electric vehicle (EV) maker followed that with three years of record revenues, margins, and profitability.
NASDAQ: TSLA
Key Data Points
But its momentum faded in 2023, especially in the year's second half. In the fourth quarter, revenue grew by a disappointing 3% while operating income almost halved. For the year, revenue grew at just 19%, significantly slower than its 2022 growth rate of 51%. Non-GAAP net income fell by 23% as a result of margin contraction.
Tesla faces multiple headwinds in the near term. To start with, the macro environment has become increasingly more challenging after a period of unusual inflation, and with interest rates now higher than they've been in many years. The former has crimped consumers' discretionary budgets, while the latter makes financing for car purchases more expensive, and more difficult for buyers to get.
In addition, competition has intensified in the last few years as the incumbents auto industry have introduced more EV models. This partially explains Tesla's decision to cut its sales prices multiple times in 2023 in an effort to maintain (and grow) its market share.
These headwinds will likely persist (if not worsen) in 2024, so it won't be surprising if Tesla reports even slower revenue growth and further margin declines. It has already instituted more price cuts in 2024, and could trim prices further in the coming quarters.
Tesla's longer-term opportunity
While the nearer term doesn't look too exciting for Tesla, its longer-term prospects remain bright as it rides multiple tailwinds that could last for years, if not decades.
Topping the list is the ongoing transition from internal combustion vehicles to electric vehicles as the world shifts toward a greener transportation model. So, while competition in the auto industry is intense, the market opportunity is vast enough to accommodate multiple players.
As the top dog in the EV segment now, Tesla has an edge in making (and selling) electric cars. Its ability to aggressively cut its prices in pursuit of more market share rests on the fact that it has already achieved industry-high margins. Management's target is to sell 20 million electric vehicles annually by 2030, more than 10 times its sales volume of 1.8 million in 2023. For perspective, the world's largest auto manufacturer, Toyota Motor (TM 0.15%), sold fewer than 10 million vehicles in 2022.
Beyond that, Tesla is set to benefit from the ongoing development of artificial intelligence (AI) systems, which would help improve its younger ventures like autonomous vehicles and humanoid robots. In particular, Tesla can employ advanced AI to learn from the vast (and ever-growing) database collected from existing Tesla fleets. The tech company's involvement in the renewable energy business -- selling solar panels, batteries, etc. -- could be another huge growth area.
In short, Tesla has ample opportunities to grow in the years to come.
A quick word on Tesla's share price
Another essential aspect that investors should consider before buying Tesla's stock is its valuation.
Investors should avoid overpaying for any company, even if it has excellent prospects. But it's better still when one can get a promising stock at a discount, which provides both better upside potential and a margin of safety.
As of this writing, Tesla's stock trades at a significant premium to its automaker peers, with a price-to-sales (P/S) ratio of 7 and a price-to-earnings (P/E) ratio of 45. For perspective, General Motors has a P/S ratio of 0.3 and a P/E of 5.3. Tesla's valuation is rich even if we compare it to a top technology company like Alphabet (GOOGL 0.31%), which has a P/S of 5.9 and a P/E of 24.3.
While Tesla's long-term prospects might entice investors to pay out for the stock, it might not be prudent for them to do so since any short-term underperformance by the business could lead to a massive contraction in its valuation. With so many uncertainties, such a scenario is not beyond the realm of possibility.
So, is Tesla's stock a buy?
Tesla's short-term outlook might be challenging, but its long-term growth story remains intact. Yet buying the stock at current valuations might expose investors to unnecessary risks, especially in this volatile macro environment.
New investors should avoid buying the stock today. Those who already own it can consider holding it for the long term if they can handle the potential volatility in the short run.
