It hasn't been fun being a Tesla (TSLA 0.96%) shareholder. What was once a darling on Wall Street has come crashing back down. A string of poorly received financial reports has given investors a lot to think about.
As of this writing, this "Magnificent Seven" stock is down 59% from its peak price, which was established in November 2021. Should you now pile into Tesla shares on the dip?
Missing the mark
To be frank, Tesla's first-quarter financial results (for the period ending March 31) were very discouraging. Revenue dipped 9% year over year, driven by a 9% decline in vehicle deliveries and lower average selling prices.
Management might have somewhat alleviated investor worries by highlighting that the entire electric vehicle (EV) industry is challenged right now. Demand isn't as strong as industry executives had hoped.
In order to spur that demand, the company has implemented multiple price cuts to maintain market share. This has been necessary given just how competitive the industry has become. There are many manufacturers that have introduced EVs in recent years, chipping away at Tesla's lead.
Lower prices have been crushing profitability. The company reported a gross margin of 25.3% in 2021, but that has fallen to 17.4% in the latest quarter. It's difficult to know when this metric will start to improve.
Making matters worse is the current macroeconomic environment. All else being equal, automakers want lower interest rates. From a customer's perspective, lower borrowing costs reduce monthly payments, which makes a new vehicle more affordable. Because inflation is proving to be sticky, the Federal Reserve might have to keep rates higher for longer, creating another lingering headwind for Tesla.
Its latest financial results are indicative of a business that continues to struggle mightily. So, why were the shares up about 15% since that earnings announcement?
As is usually the case, bullish shareholders seem to be enamored with what CEO Elon Musk says. On the first-quarter earnings call, he mentioned Tesla's product road map, with plans to "accelerate the launch of new models" early next year. The market appears to be optimistic about Tesla finally introducing a cheaper model that can help the business more effectively compete with Chinese rivals.
NASDAQ: TSLA
Key Data Points
High expectations
Musk continues to try to convince investors that this company shouldn't be valued like a typical automaker. He's a good storyteller who can drive huge excitement about what Tesla could be one day. The ultimate goal is to launch a robotaxi service that transforms every one of its cars on the road into a high-margin moneymaking machine for its owners.
But we are a long way off from this. It depends on the company's ability to introduce full self-driving capabilities, which is a big question mark. For what it's worth, it will provide more info about this ambition in August.
Even with the stock on a downward spiral, I view it as being expensive at a price-to-earnings ratio of 42.5. The market is still giving Musk the benefit of the doubt here.
However, I think we have to look at the facts in front of us. This is still a car company at its core. And it's struggling with economic- and industry-related challenges. Its innovative and disruptive qualities haven't been enough to keep revenue and profits from falling. These are troubling signs for a business that historically has posted financial results that resembled a software enterprise.
Unless you have a serious conviction that Musk can deliver on his long-term goals within a reasonable time frame, Tesla stock is best kept on the watch list for now and out of your portfolio.
