Tesla (TSLA +3.05%) has become synonymous with electric vehicles (EVs) as the technology becomes more widely adopted. But that association with a trending investment niche didn't keep Tesla's stock from getting beaten up to start 2024 nor did it stop the stock from trading nearly 60% off its all-time highs.
For some, the stock price drop might be reason enough to avoid the stock. However, with some additional context and an exploration of Tesla's current position relative to its future, the situation could also be interpreted as a minor speed bump in Tesla's growth journey. Given the differing interpretations, one has to wonder if Tesla stock is better bought, sold, or held right now. Let's explore.
Image source: Tesla.
Explaining Tesla's recent struggles
There are a few possible reasons for the dip in prices. The most apparent is investor concerns about weakened profit margins and a drop in consumer demand for EVs. With interest rates still elevated, the cost of buying an EV (or any vehicle for that matter) is much higher than just a few years ago.
To combat this, Tesla implemented a series of price cuts on its models last year. While this kept demand afloat, the price cuts eventually made their presence felt on the company's earnings reports.
TSLA Gross Profit Margin (Quarterly) data by YCharts
Back in 2021, Tesla's gross profit margin was just shy of 30%. Since then, it has fallen to around 17% today. Unless interest rates come down, CEO Elon Musk explained on the most recent earnings call that profit margins for 2024 "won't be that good."
Add it all up, and we have a reasonable explanation for why Tesla's stock price is struggling today. With this year shaping up to be less than stellar, it's no wonder investors have dumped the stock.
Don't miss the forest for the trees with Tesla
Those spooked investors are likely overestimating Tesla's struggles in the upcoming year. When factoring in Musk's charisma with a certain segment of the populace or the company's prominence in the sector, any news that isn't related to Tesla hitting new highs oftentimes is often spun up in headlines far beyond its actual impact.
Are high interest rates hindering Tesla's ability to maintain the rates of growth investors grew accustomed to in years past? Sure. Is the weakened guidance worthy of a sell-off of this magnitude? Probably not.
It's important to remember just how dominant Tesla is in the EV market. It rakes in the most profits, it's a close second on EV production to China's BYD, it continues to build factories abroad to expand its global footprint, it boasts some of the lowest costs with its strong supply chain, and it possesses one of the cleanest balance sheets not just among EV makers, but across the entire auto industry.
NASDAQ: TSLA
Key Data Points
The opportunity available to investors
On the Q4 earnings call, Tesla management explained that the company is currently between two growth cycles. The first one began with the global distribution of Model 3 and Model Y, which helped it become the world's most valuable automaker.
However, the next growth cycle will be fueled by innovative technologies such as artificial intelligence and robotics, as well as a "next-gen" EV to launch in 2025 that will retail for less than $25,000.
But until these products enter markets and interest rates come down, Tesla management is likely correct that the foreseeable future will be lackluster compared to years past. This requires investors to decide whether they are buying the stock short-term or long-term.
For investors interested in setting up portfolios for long-term growth, few other companies offer as much potential upside as Tesla. As EVs become more widely adopted, it is perfectly positioned to take advantage. Even better, as its other various technological endeavors (like AI) become more refined and begin to enter markets, Tesla could become the world's most valuable company if it executes well over the next five years. At least that's what Elon Musk claims.
While Musk is no stranger to over-optimistic timelines, he does have a track record of following through (eventually). With Tesla's stock trading at its lowest levels in over a year, I'm treating this phase between Tesla's two growth cycles as an immense buying opportunity and a chance to endorse Musk's ability to fulfill his vision. Only time will tell, but Tesla stock, roughly 60% off its all-time high, seems too good to pass up.
