At what point does Tesla (TSLA) stock become too cheap to ignore? An argument can be made that the the shares, which have fallen almost 20% over the past month, have already reached that point.
Since the electric vehicle maker reported its fourth quarter earnings January 24, TSLA stock has given up as much as 17%, falling to a low of $175. While the stock has recovered since then, reaching a recent high of $194, there’s still a 37% gap from its 52-week high of $299. This includes 20% declines in six months, while the S&P 500 index is up 12.5%. As it stands, the stock is now down 22% year to date, trailing the 5.4% rise in the S&P 500 index.
For investors who are waiting for the dust to settle, there are still plenty of reasons to expect Tesla stock to march higher. The stock has gotten grossly oversold as a result of Tesla missing Q4 estimates on both earnings and revenue. While Wall Street continues to focus on the company’s pricing challenges and headwinds related to demand, this isn’t the first time that pundits have proclaimed the death of the EV transformation and called into question Tesla’s leadership capabilities in that industry.
ARK Invest's Cathie Wood remains bullish on the Tesla stock. "Tesla is going through a low right now related to the cycle," Wood said on CNBC. "But when autonomous taxi networks, platforms kick in, as we think they will within the next two years... then what we’re talking about with Tesla is a reacceleration in growth and a huge increase in margins," she added.
Meanwhile, Wedbush Securities' Dan Ives, who believes the bears have it wrong, added more assurance to Tesla stock. "We could not disagree more with the ultra negative Tesla narrative building and forming a black cloud over the stock," Ives wrote in a note to investors. "While the next few months are clearly a bit cloudy for the Tesla story and overall EV demand, longer term our view is that by the end of the decade ~20% of autos will be EV with autonomous and FSD a reality and not a dream/aspiration."
In citing Tesla’s downbeat earnings report, Ives was unwavering in his support, maintaining his buy-equivalent “Outperform” rating with a 12-month price target of $315. From current levels, Ives price target assumes potential premiums of 66%. To be sure, there are still critical questions that Tesla must answer for investors, namely the outlook for margins after price cuts in several markets. This is where the company will need to show revenue growth in higher-margin service businesses such as its Full Self-Driving (FSD) software, which is poised to reenergize the company’s profit margins.
The company is betting heavily on FSD which will be the birth of the autonomous vehicle evolution and is designed to automate Tesla vehicles so they can operate without a driver behind the wheel. Tesla’s FSD is at Level 3 automation (conditional driving automation), which means a driver should be engaged at all time. However, once FSD can navigate autonomously, it will not only boost Tesla’s profit margins, it will be a profit center of recurring revenues for Tesla through the company’s ambition for Robotaxis.
Essentially, while the market is focused on the near-term headwinds revealed in the Q4 earnings report, it was noteworthy that Tesla management spent a significant amount of time discussing high-margin services. The company’s efforts to monetize its FSD feature by licensing the FSD software to other EV makers can become a lucrative business to reenergize the stock. Essentially, Tesla’s current competitors may eventually become the company’s partners.
As such, with Tesla stock trading below where it stood both one year ago and two years ago, now is the time to bet on a rebound in the next 12 to 18 months.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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