In the past 10 years, shares of Tesla (TSLA 0.82%) have been very good to investors. They have soared 1,100% during that time, a gain that far exceeds what the Nasdaq Composite Index has done.
Credit goes to the company for completely spearheading the electric vehicle (EV) industry. It has developed into a strong brand on a global stage, with its popular cars and focus on innovative software features.
Despite the favorable traits, this top EV stock has had a difficult go of it in recent times. It's down 33% just this year as of April 25.
So you might be ready to buy Tesla on the dip. Before doing so, here are three things you need to know about the business.
1. Cars and more
Tesla commands 20% of the global market for battery EVs. This position has been established thanks to the company's first-mover advantage in the space.
For example, the Model S was launched in 2012. Tesla's rapid growth set off a race among traditional and upstart carmakers to invest in EVs.
It's not a surprise that designing, manufacturing, and selling vehicles is this company's bread and butter. In 2023, 85% of total revenue came from car sales. In addition to the Model S, Tesla's lineup includes the Model 3, Model Y, Model X, and Cybertruck. The business also sells a semi truck.
Tesla brings in a small amount of revenue from services and retail merchandise, which grew 25% in the first quarter on a year-over-year basis. And the company has a presence in energy generation and storage. Sales for this segment came in at $1.6 billion in the first quarter, accounting for under 8% of the company's total.
NASDAQ: TSLA
Key Data Points
2. Narratives matter
You would think that because Tesla generates the bulk of its revenue from the sale of vehicles, its valuation would reflect this reality. This is a difficult industry with intense competition, huge capital requirements, and some level of cyclicality.
But the stock trades at a steep price-to-earnings ratio of 42.5. The company's rivals have much smaller valuation metrics, and this points to Tesla being a story stock. In other words, shareholders seem to always be enamored with founder and CEO Elon Musk. His storytelling has often mattered more than the company's underlying fundamentals.
That's not necessarily a good or a bad thing. If you're looking to buy shares, you have to realize that there will always be some sort of Musk premium embedded in the price. And that hinges on his promises of grand ambitions, like a fully autonomous and global robotaxi service that will experience "quasi-infinite" demand, becoming a reality. No matter how exciting it sounds, this outcome is uncertain.
Musk said on the first-quarter earnings call: "I think Cathie Wood said it best. Like really, we should be thought of as an AI or robotics company." Based on the stock's expensive valuation, the market is still buying into this way of thinking.
3. Ongoing challenges
Tesla stock has gotten absolutely shellacked and is down 59% from its peak price. More recently, weak financial results are making investors nervous.
In the first three months of 2024, the business reported a 9% and 55% year-over-year decline in revenue and net income, respectively. The industry is seeing softer demand for EVs, especially outside of China. So Tesla has cut vehicle prices numerous times to boost demand, a strategic move that could have been influenced by stiffer competition. This is also hurting profitability.
Add this unfavorable setup to a tighter macro backdrop, and Tesla's challenges might continue for the foreseeable future. That means it's anyone's guess when sales and profit will start trending in the right direction again.
Hopefully by now, you have a more thorough understanding of this "Magnificent Seven" stock. This info can help guide your investment decision.
