Insights

Tesla: The Bull and Bear Cases Right Now

Tesla (NASDAQ: TSLA) has taken investors on a roller-coaster ride since the start of 2022 — falling, recovering, and then falling again. It’s now down 30% year to date, which is a steep decline compared to the S&P 500‘s 14% slump. As a result, Tesla bulls are even more enthusiastically promoting this as a golden buying opportunity. Tesla bears, on the other hand, have not hesitated to warn investors that shares of Elon Musk’s electric vehicle (EV) company could be heading much lower.

After surpassing a $1 trillion market capitalization at the end of 2021, the company’s market value now sits at around $770 billion. Does the polarizing EV leader have what it takes to reclaim its $1 trillion status and continue to grow well into the future?

Image source: Getty Images.

What the bulls are saying

The bulls are absolutely thrilled with Tesla’s operational performance up to this point. As they should be — Tesla posted a record-breaking first-quarter report despite COVID-related factory shutdowns in China and persistent supply chain issues. Its top line grew 81% year over year to $18.8 billion, and its adjusted earnings rocketed 246% to $3.22 per share. Adjusted EBITDA margin expanded by 906 basis points to 26.8%, and the company generated $2.2 billion in free cash flow — a jaw-dropping 660% increase over the year-ago period.

Total production and vehicle deliveries grew 69% and 68% year over year to 305,407 and 310,048, respectively, and management forecasts 50% average annualized growth in deliveries over a multiyear time horizon. Tesla is still expanding its business at a rapid clip, and fortunately for the EV juggernaut, the company is well-resourced to fund its ambitious product roadmap. Boasting $18.0 billion in cash, cash equivalents, and short-term marketable securities on its balance sheet, and only $100 million in debt excluding vehicle and energy product financing, Tesla’s finances are rock-solid, to say the least. Combined with the fact that it has evolved into a highly profitable business, the bulls have every right to be grinning ear to ear.  

What the bears are saying

The bears are quick to point out the EV company’s outrageously high valuation. Even after shedding more than 30% of its value this year, the stock still trades at 60 times forward earnings — a steep premium relative to other automobile manufacturers. Traditional automakers Ford and General Motors are trading at forward price-to-earnings multiples of 7.0 and 5.3, respectively. Tesla’s lofty valuation is enough to keep value investors out of the picture for now.

The EV pacesetter also faces a variety of headwinds at the moment. A high-inflation environment is never ideal for consumer discretionary stocks, and supply chain restraints are expected to persist for the foreseeable future. Likewise, Musk has not helped Tesla’s cause with his distracting potential takeover of Twitter and his recent comments about cutting the company’s salaried workforce, suggesting that a recession in the near future is likely. Between the macro conditions and its CEO’s penchant for generating polarizing headlines, there’s certainly a good chance Tesla’s stock will experience more downward pressure. 

Should investors buy Tesla now?

When viewed through a long-term investing lens, Tesla is a worthwhile buy today. Compared to traditional auto manufacturers, its stock is undeniably expensive. However, the EV industry is expanding at a much faster pace, and Tesla’s growth rates are markedly better than those of legacy car makers. Plus, the stock is more reasonably priced than other pure-play EV companies. Up-and-comers Lucid Group and Rivian Automotive trade at forward price-to-sales multiples of 23.2 and 13.8, respectively, versus Tesla’s 8.6 right now.

Overall, I view Tesla’s pullback as a sound buying opportunity. The company’s EV business is growing robustly, and it still possesses a boatload of potential with its battery storage segment and its plans for fully self-driving cars moving forward. It’s important to assess the risks, but I feel at ease recommending Tesla stock today.

Luke Meindl has positions in Tesla. The Motley Fool has positions in and recommends Tesla and Twitter. The Motley Fool has a disclosure policy.

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