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The Investment Case for Tesla (TSLA): Buy the Latest Dip?
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Tesla (TSLA - Free Report) has been one of the most amazing growth stocks since its market debut in 2010, outperforming major tech titans and auto giants. While the electric vehicle (EV) bigwig had its share of ups and downs, it generated mind-boggling returns for patient investors.
Indeed, its pricey valuation has never made sense but Tesla fans have always believed in Elon Musk’s vision. From a shaky startup, Tesla has come a long way on the back of its soaring popularity of e-mobility, exciting products, aggressive expansion efforts and legions of loyal fans. After running into losses for years, Tesla notched up its first full-year profit in 2020. Ever since, TSLA has managed to be in the black, proving its skeptics wrong.
Over the last five years, shares of the company have skyrocketed more than 2,300%. But the stellar run on the bourses hit a pause this year, as is the case with many exciting and high-flying growth stocks. Logistical issues surfaced as a thorn in Tesla’s narrative. An ultra-hawkish Fed is further spoiling the momentum. Year to date, Tesla has plummeted roughly 50%, making even its most steady supporters jittery. On Friday, the stock sank to a 52-week low of $176.55, ending the session a tad higher at $180.19.
Does the recent dip represent a buying opportunity? Before we look at Tesla’s outlook and valuation to see if it is indeed a good time to buy its shares, let’s check out what has been ailing the stock’s performance lately.
Q3 Sales Miss, Twitter Hangover & Other Pain Points
Tesla reported third-quarter earnings last month, with the bottom line beating the Zacks Consensus Estimate but revenues missing the same.Top-line growth was underwhelming, with sales missing expectations by 4% on revenues of $21.45 billion. A record 343,830 deliveries during the quarter slightly missed expectations as well. Shedding light on logistical challenges, management notified in a press release, “As our production volumes continue to grow, it is becoming increasingly challenging to secure vehicle transportation capacity and at a reasonable cost during these peak logistics weeks.” Of course, investors are discouraged by the sales miss and logistics concerns.
Markets aren’t reacting too well to Musk’s takeover of Twitter. Tesla investors fear that Twitter could be a distraction for the entrepreneur. Musk’s selling of TSLA shares to fund Twitter is not going down well with its shareholders. Earlier this month, Musk liquidated more Tesla shares following his Twitter acquisition. He sold 19.5 million shares worth close to $4 billion, bringing the total value of Tesla shares sold by Musk to roughly $20 billion so far this year. A big concern of TSLA shareholders is that Musk will be spread too thin across all his responsibilities because of the Twitter takeover. Speculations are rife that the widely-hailed Tesla CEO doesn’t have enough time on his hands to navigate both companies properly.
The stock was also hurt by the recent price cuts for its EVs in China. Tesla slashed the prices of Model 3/Y cars as much as 9% in China during late October amid signs of softening demand and rising competition in the world’s largest car market. Tesla is hardly immune to the supply-chain issues, and economic uncertainty and aggressive rate hikes are making matters worse for the automaker.
Long-Term Prospects Still Strong
The world is doubling down on EV adoption with government subsidies, policy changes and infrastructure buildup. And Tesla has gradually established itself as a leader in the e-mobility space. This should be the perfect backdrop for solid growth into the foreseeable future. Tesla has a 5-year expected EPS growth rate of 31.4%, higher than the industry’s 18.7%.
Robust demand for Models 3 and Y, production ramp-up at gigafactory 4 (in Berlin) and 5 (in Austin), and introduction of models, including Semi and Cybertruck, are set to support delivery growth. Musk expects deliveries to surge at 30% annualized rate for the foreseeable future. It’s also worth noting that Tesla boasts an energy business with the potential to grow faster than its vehicles business. Tesla’s energy generation and storage revenues are on a massive growth trajectory, thanks to the positive reception of Megapack and Powerwall products.
Valuation & Growth Estimates
Despite the massive sell-off this year, Tesla shares are still overvalued. TSLA has a P/E ratio of 34.95, above the industry average of 28.41. While the premium may be a factor, Tesla has never really been a value stock. Also, valuation is starting to become reasonable as the company is consistently improving its business model. Although expensive at 34.95X P/E, the value is the lowest level the shares have traded this year so far. TSLA’s P/S of 5.10 is also much lower than its decade-high 18.73 and near-the-median 4.06.
While there could be better buying opportunities ahead, Tesla is trading at a far better valuation than it has in the past. Also, electric vehicles still represent a relatively small portion of the auto industry market and the space still has massive scope to grow.
Year over year, TSLA’s 2022 EPS is now expected to rise 79.2% to $4.05. Earnings in 2023 are expected to jump another 30.5% to $5.29 per share. The top line is expected to climb 54% this year. Estimates point to another 39% ascent to $115.11 billion in 2023, more than quadrupling pre-pandemic sales of $24.57 billion registered in 2019.
Final Words
As Tesla's shares have slumped in the red year to date, long-term investors are therefore presented with an opportunity to buy the dips at a level not seen in some time. TSLA’s valuation multiples fell extensively, perhaps enticing investors with a long-term horizon. Further, Tesla has a strong growth profile, with revenue and earnings projected to soar by double-digit percentages in its current year and next. We believe, Tesla is a solid long-term investment option at current price levels based on its market leadership, progressively broadening global operations and new product developments that promise to take it to dizzy heights in the coming years.
However, near-term headwinds persist. Tesla faces problems related to raw material procurement and the logistics. The strong U.S. dollar also doesn’t help a company that generates a significant percentage of sales overseas and a substantial ramp-up in production in the country. Commodity inflation has been shrinking the automotive gross margins of Tesla for the past two quarters. Persistent rate hikes and fears of a potential recession may create better opportunities, as the shares could get beaten down further. Considering all the tailwinds and headwinds, it would be a good idea to take a wait-and-see approach on Tesla. The currently Zacks #3 (Hold) of TSLA underscores our stance on the stock.
While Tesla currently carries a Zacks Rank #3 (Hold), we present you two stocks from the auto space that currently have a Zacks Rank #2 (Buy).
Harley-Davidson (HOG - Free Report) : One of the leading motorcycle makers in the world, Harley-Davidson is currently focusing on motorcycle models and technologies that better align with the market trends. HOG's ‘Hardwire’ plans look to improve effectiveness and contribute to revenue growth.
The Zacks Consensus Estimate for Harley-Davidson’s 2022 sales and EPS is pegged at 7.5% and 12.4% growth each from the respective year-ago reported figures. HOG has a Value Score of A. The stock’s earnings surpassed estimates in three of the last four quarters and missed once, the average surprise being 43.24%.
PACCAR (PCAR - Free Report) : PACCAR is one of the leading names in the trucking business with reputed brands like Kenworth, Peterbilt and DAF. PCAR's accelerated efforts toward electrification and connected vehicle services are set to boost prospects.
The Zacks Consensus Estimate for PACCAR’s 2022 sales and EPS stands at 21.6% and 53.2% growth each from the respective year-earlier reported numbers. PCAR has a Value Score of A. The stock’s earnings exceeded estimates in each of the last four quarters, the average being 12.6%.
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The Investment Case for Tesla (TSLA): Buy the Latest Dip?
Tesla (TSLA - Free Report) has been one of the most amazing growth stocks since its market debut in 2010, outperforming major tech titans and auto giants. While the electric vehicle (EV) bigwig had its share of ups and downs, it generated mind-boggling returns for patient investors.
Indeed, its pricey valuation has never made sense but Tesla fans have always believed in Elon Musk’s vision. From a shaky startup, Tesla has come a long way on the back of its soaring popularity of e-mobility, exciting products, aggressive expansion efforts and legions of loyal fans. After running into losses for years, Tesla notched up its first full-year profit in 2020. Ever since, TSLA has managed to be in the black, proving its skeptics wrong.
Over the last five years, shares of the company have skyrocketed more than 2,300%. But the stellar run on the bourses hit a pause this year, as is the case with many exciting and high-flying growth stocks. Logistical issues surfaced as a thorn in Tesla’s narrative. An ultra-hawkish Fed is further spoiling the momentum. Year to date, Tesla has plummeted roughly 50%, making even its most steady supporters jittery. On Friday, the stock sank to a 52-week low of $176.55, ending the session a tad higher at $180.19.
Does the recent dip represent a buying opportunity? Before we look at Tesla’s outlook and valuation to see if it is indeed a good time to buy its shares, let’s check out what has been ailing the stock’s performance lately.
Q3 Sales Miss, Twitter Hangover & Other Pain Points
Tesla reported third-quarter earnings last month, with the bottom line beating the Zacks Consensus Estimate but revenues missing the same.Top-line growth was underwhelming, with sales missing expectations by 4% on revenues of $21.45 billion. A record 343,830 deliveries during the quarter slightly missed expectations as well. Shedding light on logistical challenges, management notified in a press release, “As our production volumes continue to grow, it is becoming increasingly challenging to secure vehicle transportation capacity and at a reasonable cost during these peak logistics weeks.” Of course, investors are discouraged by the sales miss and logistics concerns.
Markets aren’t reacting too well to Musk’s takeover of Twitter. Tesla investors fear that Twitter could be a distraction for the entrepreneur. Musk’s selling of TSLA shares to fund Twitter is not going down well with its shareholders. Earlier this month, Musk liquidated more Tesla shares following his Twitter acquisition. He sold 19.5 million shares worth close to $4 billion, bringing the total value of Tesla shares sold by Musk to roughly $20 billion so far this year. A big concern of TSLA shareholders is that Musk will be spread too thin across all his responsibilities because of the Twitter takeover. Speculations are rife that the widely-hailed Tesla CEO doesn’t have enough time on his hands to navigate both companies properly.
The stock was also hurt by the recent price cuts for its EVs in China. Tesla slashed the prices of Model 3/Y cars as much as 9% in China during late October amid signs of softening demand and rising competition in the world’s largest car market. Tesla is hardly immune to the supply-chain issues, and economic uncertainty and aggressive rate hikes are making matters worse for the automaker.
Long-Term Prospects Still Strong
The world is doubling down on EV adoption with government subsidies, policy changes and infrastructure buildup. And Tesla has gradually established itself as a leader in the e-mobility space. This should be the perfect backdrop for solid growth into the foreseeable future. Tesla has a 5-year expected EPS growth rate of 31.4%, higher than the industry’s 18.7%.
Robust demand for Models 3 and Y, production ramp-up at gigafactory 4 (in Berlin) and 5 (in Austin), and introduction of models, including Semi and Cybertruck, are set to support delivery growth. Musk expects deliveries to surge at 30% annualized rate for the foreseeable future. It’s also worth noting that Tesla boasts an energy business with the potential to grow faster than its vehicles business. Tesla’s energy generation and storage revenues are on a massive growth trajectory, thanks to the positive reception of Megapack and Powerwall products.
Valuation & Growth Estimates
Despite the massive sell-off this year, Tesla shares are still overvalued. TSLA has a P/E ratio of 34.95, above the industry average of 28.41. While the premium may be a factor, Tesla has never really been a value stock. Also, valuation is starting to become reasonable as the company is consistently improving its business model. Although expensive at 34.95X P/E, the value is the lowest level the shares have traded this year so far. TSLA’s P/S of 5.10 is also much lower than its decade-high 18.73 and near-the-median 4.06.
While there could be better buying opportunities ahead, Tesla is trading at a far better valuation than it has in the past. Also, electric vehicles still represent a relatively small portion of the auto industry market and the space still has massive scope to grow.
Year over year, TSLA’s 2022 EPS is now expected to rise 79.2% to $4.05. Earnings in 2023 are expected to jump another 30.5% to $5.29 per share. The top line is expected to climb 54% this year. Estimates point to another 39% ascent to $115.11 billion in 2023, more than quadrupling pre-pandemic sales of $24.57 billion registered in 2019.
Final Words
As Tesla's shares have slumped in the red year to date, long-term investors are therefore presented with an opportunity to buy the dips at a level not seen in some time. TSLA’s valuation multiples fell extensively, perhaps enticing investors with a long-term horizon. Further, Tesla has a strong growth profile, with revenue and earnings projected to soar by double-digit percentages in its current year and next. We believe, Tesla is a solid long-term investment option at current price levels based on its market leadership, progressively broadening global operations and new product developments that promise to take it to dizzy heights in the coming years.
However, near-term headwinds persist. Tesla faces problems related to raw material procurement and the logistics. The strong U.S. dollar also doesn’t help a company that generates a significant percentage of sales overseas and a substantial ramp-up in production in the country. Commodity inflation has been shrinking the automotive gross margins of Tesla for the past two quarters. Persistent rate hikes and fears of a potential recession may create better opportunities, as the shares could get beaten down further. Considering all the tailwinds and headwinds, it would be a good idea to take a wait-and-see approach on Tesla. The currently Zacks #3 (Hold) of TSLA underscores our stance on the stock.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
2 Auto Stocks to Bet on
While Tesla currently carries a Zacks Rank #3 (Hold), we present you two stocks from the auto space that currently have a Zacks Rank #2 (Buy).
Harley-Davidson (HOG - Free Report) : One of the leading motorcycle makers in the world, Harley-Davidson is currently focusing on motorcycle models and technologies that better align with the market trends. HOG's ‘Hardwire’ plans look to improve effectiveness and contribute to revenue growth.
The Zacks Consensus Estimate for Harley-Davidson’s 2022 sales and EPS is pegged at 7.5% and 12.4% growth each from the respective year-ago reported figures. HOG has a Value Score of A. The stock’s earnings surpassed estimates in three of the last four quarters and missed once, the average surprise being 43.24%.
PACCAR (PCAR - Free Report) : PACCAR is one of the leading names in the trucking business with reputed brands like Kenworth, Peterbilt and DAF. PCAR's accelerated efforts toward electrification and connected vehicle services are set to boost prospects.
The Zacks Consensus Estimate for PACCAR’s 2022 sales and EPS stands at 21.6% and 53.2% growth each from the respective year-earlier reported numbers. PCAR has a Value Score of A. The stock’s earnings exceeded estimates in each of the last four quarters, the average being 12.6%.