Is Tesla Stock a Buy?
Many tech stocks have performed well in 2023, including Tesla (NASDAQ: TSLA), whose shares are up an incredible 107% (as of Aug. 2). Having a favorable market environment, as evidenced by the Nasdaq Composite Index's 34% rise this year, also helps.
Investors are likely warming up to growth stocks again following a difficult year in 2022. And as the top electric vehicle (EV) company, Tesla is once again attracting a lot of attention.
Is the business a worthy addition to your portfolio? Let's dive deeper into the world of Tesla.
Recent trends
Tesla beat Wall Street estimates with its latest financial update, generating revenue of $24.9 billion and diluted earnings per share of $0.78. The business also produced 480,000 vehicles during the period, up 86% year over year.
However, shareholders weren't happy to see that Tesla's gross margin shrunk from 25% in Q2 2022 to 18.2% in the most recent quarter. Management was forced to cut the prices of cars multiple times this year in an effort to boost demand at a time when consumers have been dealing with higher interest rates and inflationary pressures.
Pricing cuts certainly deserve a lot of the blame for the shrinking operating margin too. However, Tesla's research and development (R&D) expenses of $943 million during the quarter, which were up 41% year over year, hurt profitability as well. The benefit of continuing to spend heavily on R&D, though, is that it can maintain Tesla's lead as a trailblazer in the industry.
Bigger picture
Tesla has quickly become a powerful brand in the technology and automotive sectors, known for its innovation, disruption, and forward-thinking designs. Additionally, thanks to the company's massive investments in building up its manufacturing capacity, it's starting to develop a cost advantage when making automobiles. The company is profitable, while a legacy automaker like Ford constantly loses money in its EV division.
These competitive strengths position Tesla to make progress toward Musk's long-term goal, centered on autonomous self-driving. While Tesla does sell cars with its branded full self-driving (FSD) capabilities, they aren't fully autonomous. This means that right now a driver still must pay attention and be ready to intervene and take control if necessary.
If full autonomy is achieved, something Musk believes could happen later this year, it could be a huge financial boon for Tesla. That's because this software, coupled with Tesla's expanding manufacturing capabilities, could turn the company into a provider of robotaxis, which could experience unprecedented demand from consumers and drive outsized revenue and earnings growth over time.
"The short-term variances in gross margin and profitability really are minor relative to the long-term picture," Musk said on the Q2 2023 earnings call. "Autonomy will make all of these numbers look silly." He has been overly aggressive with his timing deadlines before, so who knows when, or if, this will come to fruition. But it's hard to bet against Elon Musk.
Approaching the trillion-dollar mark
As of this writing, Tesla's market cap was just under $800 billion, making it one of the largest companies in the world. This is obviously indicative of the rapid success of the business, as well as investors' appreciation of what Elon Musk has done. However, investors might be right to ask how much more valuable Tesla can really become. Does Tesla deserve a market cap that rivals those of the internet giants, which are some of the most successful businesses ever? I'm not sure.
To its credit, Tesla appears to be consistently profitable now, so investors can value the stock based on its earnings. But shares currently trade at a trailing price-to-earnings (P/E) ratio of 72. That's not cheap at all, especially when compared to the Nasdaq 100 Index's multiple of 35.
Investors who aren't spooked by the steep valuation or Tesla's huge market cap might still consider buying the stock. If you have confidence that the company can continue its impressive growth in the decade ahead while finding ways to boost profitability, objectives that Musk definitely believes it can hit, then the shares deserve a closer look.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
