There's no denying Tesla (TSLA 0.88%) is accomplishing extraordinary things and will likely continue doing so for years to come. The Elon Musk-led company is building fully electric cars for the masses, growing a massive energy storage business, and developing bleeding-edge technology, all while amassing a war chest of cash that will likely help further fortify its competitive position. But it's not a perfect business -- far from it. Yet the stock's extremely rich valuation demands that it at least come close to perfect.
Despite the company's long history of incredible execution and high odds for a bright future, Tesla's latest quarterly results suggest the electric car maker's stock may be overvalued. But here's the caveat: The company may have an ace up its sleeve. Betting on this potential ace, however, is risky.
NASDAQ: TSLA
Key Data Points
A mismatch in fundamentals and valuation
A high-interest-rate environment, making vehicle affordability difficult for consumers, has been a major headwind for Tesla. The company's total automotive revenue for the year fell 6%, the company revealed in its fourth-quarter update on Wednesday afternoon. For its fourth quarter specifically, automotive revenue fell an even sharper 8% year over year. Fortunately, a 113% year-over-year increase in energy generation and storage revenue helped the company post growth for the period (a 31% year-over-year increase in services and other revenue helped, too). But the energy generation and storage segment's impact was minimal since it accounted for only 12% of total revenue. Total fourth-quarter revenue rose 2% year over year.
Combining Tesla's declining automotive revenue with a two-percentage-point contraction in its operating margin, Tesla's net income plummeted for the quarter. Earnings on a per share basis came out to $0.66 for the period, down 71% year over year. The lower operating margin was due to lower average selling prices for its four top-selling models and increased spending on artificial intelligence and other research and development projects, Tesla explained in its fourth-quarter update.
This mediocre performance is particularly concerning when investors consider that the stock currently boasts a price-to-earnings ratio of nearly 200 times earnings (approximately 165 on a non-GAAP basis).
Is this Tesla's secret weapon?
Of course, anyone who follows Tesla closely enough knows that a bet on the stock has little to do with the company's results today. The bull case is dependent on the company's bold ambitions for its future, including plans to launch a service that will turn its existing fleet of vehicles into an autonomous taxi service and eventually even sell humanoid robots.
Still, these future developments are uncertain and difficult to model. Even if Tesla launches an autonomous taxi service later this year, as it plans to do so in Austin by this summer, it's extremely difficult to know how well the company will execute on this plan, how profitable the service will be, and how quickly Tesla can scale the service to other markets. Many investors, therefore, are looking for a more certain catalyst. The company's plans for a more affordable vehicle could be the spark needed to shift the stock into high gear.
"Plans for new vehicles, including more affordable models, remain on track for the start of production in the first half of 2025," Tesla said in its fourth-quarter update.
While little is known about the pricing or features of these "more affordable models," they would almost certainly lead to higher demand and sales for the company at a time when price is especially important to the car buyer. The launch of a new, more affordable model could give Tesla investors a concrete catalyst to hold onto while they wait to see how the company's more speculative projects pan out.
With this said, a more affordable vehicle brings with it its own issue: a lower profit margin. This will especially be the case in the early days of the vehicle's production. As has been the case for all the vehicles Tesla has launched, the company doesn't start profiting meaningfully from a new model until production has scaled to a meaningful level. So, 2025 could be a year of heavy spending and even lower profits if Tesla does bring this vehicle to market. Nevertheless, a new model could help Tesla return to growth and it could reinvigorate the growth story.
But betting on this catalyst is still risky. Trading at nearly 200 times earnings, rapid growth and innovation is already priced into the stock. The company will have to execute with near-perfect precision in the coming years to live up to the hype surrounding its shares.
