The Investment Case for Tesla (TSLA): Buy the Latest Drop?

Tesla TSLA has been one of the most astonishing growth stocks since its market debut in 2010, outperforming major tech titans and automotive giants. While the electric vehicle (EV) bigwig has had its share of ups and downs, it has generated dizzying returns for patient investors.

In fact, his expensive valuation never made sense, but Tesla fans have always believed in Elon Musk’s vision. From a wobbly startup, Tesla has come a long way thanks to the growing popularity of electric mobility, exciting products, aggressive expansion efforts, and legions of loyal fans. After suffering losses for years, Tesla made its first full-year profit in 2020. Since then, TSLA has managed to be in the black, proving its skeptics wrong.

Over the past five years, the company’s stock has skyrocketed more than 2,300%. But this year’s stellar run has come to a halt, as is the case with many high-flying, exciting growth stocks. Logistical issues have emerged as a thorn in the side of Tesla’s narrative. An ultra-hawkish Fed is further marring the momentum. Since the beginning of the year, Tesla is down about 50%, making even its staunchest supporters nervous. The stock fell to a 52-week low of $176.55 on Friday, closing the session a little higher at $180.19.

Is the recent decline a buying opportunity? Before we look at Tesla’s outlook and valuation to see if it is indeed a good time to buy its stock, let’s look at what has been hurting the stock’s performance lately.

Lost sales in the third quarter, Twitter hangover and other pain points

Tesla reported third-quarter earnings last month, with the bottom line topping Zacks’ consensus estimate but revenues weren’t equal. A record 343,830 deliveries during the quarter also fell short of expectations slightly. Shedding light on the logistical challenges, the management said in a press release: “As our production volumes continue to grow, it is becoming increasingly difficult to secure vehicle carrying capacity and at a reasonable cost during these peak logistics weeks.” . Naturally, investors are daunted by lost sales and logistical concerns.

Markets aren’t reacting very well to Musk’s takeover of Twitter. Tesla investors fear Twitter could be a distraction for the entrepreneur. Musk’s sale of TSLA stock to fund Twitter isn’t going well with his shareholders. Earlier this month, Musk sold off more Tesla stock following his takeover of Twitter. He sold 19.5 million shares worth nearly $4 billion, bringing the total value of Tesla shares sold by Musk to about $20 billion so far this year. A big concern of TSLA shareholders is that Musk will be spread too much in all the responsibilities of him due to the Twitter takeover. Speculations are rife that the widely acclaimed Tesla CEO doesn’t have enough time on his hands to properly navigate both companies.

The stock also suffered from recent price cuts on its electric vehicles in China. Tesla cut the prices of Model 3/Y cars by up to 9% in China in late October amid signs of weakening demand and increased competition in the world’s largest auto market. Tesla is hardly immune to supply chain problems, and economic uncertainty and aggressive rate hikes are making things worse for the automaker.

Long-term outlook still strong

The world is doubling down on EV adoption with government subsidies, policy changes, and infrastructure development. And Tesla has gradually established itself as a leader in the electric mobility space. This should be the perfect backdrop for solid growth in the near future. Tesla has a projected 5-year EPS growth rate of 31.4%, higher than the industry’s 18.7%.

Strong demand for Models 3 and Y, increased production at gigafactory 4 (in Berlin) and 5 (in Austin) and introduction of models including Semi and Cybertruck are set to support shipment growth . Musk expects deliveries to increase at a 30% annual rate for the foreseeable future. It’s also worth noting that Tesla boasts an energy business with the potential to grow faster than the vehicle business. Tesla’s power generation and storage revenues are on a trajectory of massive growth, thanks to the positive reception of Megapack and Powerwall products.

Valuation and growth estimates

Despite the massive sell-off this year, Tesla shares are still overvalued. TSLA has a P/E ratio of 34.95, higher than the industry average of 28.41. While premium may be a factor, Tesla has never really been a stock of value. Furthermore, the valuation is starting to become reasonable as the company is constantly improving its business model. Though expensive at 34.95XP/E, the value is the lowest the shares have traded so far this year. TSLA P/S of 5.10 is also well below its 10-year high of 18.73 and close to the median of 4.06.

While there may be better buying opportunities in the future, Tesla is trading at a much better valuation than in the past. Furthermore, EVs still represent a relatively small portion of the automotive industry market, and the space still has huge growth potential.

Year-over-year, 2022 TSLA EPS is now expected to increase 79.2% to $4.05. Earnings in 2023 are expected to rise another 30.5% to $5.29 per share. The top line is expected to rise 54% this year. Estimates point to another 39% climb to $115.11 billion in 2023, more than quadrupling the pre-pandemic sales of $24.57 billion recorded in 2019.

Final words

As Tesla’s shares have plunged in the red year to date, long-term investors are therefore being presented with an opportunity to buy dips to a level not seen in some time. TSLA’s valuation multiples have declined significantly, perhaps enticing investors with a long-term horizon. Additionally, Tesla has a strong growth profile, with revenue and profit expected to increase by double-digit percentages this year and next. We believe Tesla is a solid long-term investment option at current price levels based on its market leadership, incremental expansion of global operations, and new product developments that promise to take it to soaring heights in the coming years.

However, near-term headwinds persist. Tesla faces problems related to the procurement of raw materials and logistics. Furthermore, the strong US dollar does not help a company that generates a significant percentage of sales abroad and a substantial increase in production in the country. Commodity inflation has squeezed Tesla’s automotive gross margins over the past two quarters. Persistent rate hikes and fears of a potential recession can create better opportunities, as equities could experience further declines. Considering all the tailwinds and headwinds, it would be a good idea to take a wait-and-see approach on Tesla. TSLA’s current Zacks #3 (Hold) underscores our position on the stock.

you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stock here.

2 automatic actions to bet on

While Tesla currently holds a Zacks No. 3 (hold), we present to you two titles from the car space that currently have a Zacks #1 rank. 2 (purchase).

harley davidson HOG: One of the world’s leading motorcycle manufacturers, Harley-Davidson is currently focusing on motorcycle designs and technologies that better align with market trends. HOG’s “Hardwire” plans aim to improve effectiveness and contribute to revenue growth.

Zacks’ consensus estimate for Harley-Davidson’s 2022 sales and EPS is pegged at 7.5% and 12.4% growth each over their respective data reported a year ago. HOG has a Value Score of A. The stock’s earnings beat estimates in three of the past four quarters and missed once, by an average surprise of 43.24%.

PACCAR PCAR: PACCAR is one of the leading names in the trucking industry with renowned brands such as Kenworth, Peterbilt and DAF. PCAR’s accelerated efforts toward electrification and connected vehicle services are set to boost prospects.

Zacks’ consensus estimate for PACCAR’s 2022 sales and EPS stands at 21.6% and 53.2% growth each over their respective numbers reported a year earlier. PCAR has a Value Score of A. The stock’s earnings beat estimates in each of the past four quarters, averaging 12.6%.

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