Tesla: Buy, Sell, or Hold?

For the first time in quite a while, Tesla (NASDAQ: TSLA) investors have to readjust expectations as macroeconomic headwinds dampen growth prospects in 2024. As CEO Elon Musk put it during the company's fourth-quarterearnings call as long as interest rates remain elevated, profit margins "won't be that good" for the upcoming year.

So after years of monumental growth, Tesla finds itself in unfavorable territory. With management forecasting that growth will slow in 2024, the stock shed more than 10% in the wake of the earnings report, and remains nearly 50% below its all-time high. Is it time to finally sell the electric vehicle (EV) champion?

group of tesla super chargers with logo in view

Image source: Tesla

Breaking down 2023: A mixed bag

Although 2024 isn't shaping up to be stellar, 2023 had some bright spots. Most notably, Tesla made remarkable progress in vehicle production and deliveries. Total production increased by 35% to more than 1.85 million vehicles. Similarly, deliveries surged by 38% to 1.81 million. As a result, Tesla's revenue reached $96.7 billion, a new record for the company, helping its stock price more than double in 2023 after a massive decline in 2022.

Though it was a record year in some ways for Tesla, 2023 is expected to be remembered as the year when its profits started declining. While the company's revenue was at an all-time high, Tesla's decision to slash prices across its most popular models led to a drop in profit margins. In Q1 2022, Tesla enjoyed gross profit margins of almost 30% and operating margins of 19%. Since then, they have decreased by nearly half to 17% and 8%, respectively.

TSLA Revenue (Quarterly) Chart

TSLA Revenue (Quarterly) data by YCharts.

With interest rates likely to remain elevated compared to where they've been for most of the past decade, the prospects of Tesla having a bounce-back year seem slim. While price cuts were helpful to a certain degree, there are few other remaining options to maintain volume growth. As Musk said on the latestearnings call as long as interest rates stay higher, keeping monthly payments on auto loans higher, the company's sales and profits will take a hit: "There are no tricks to get around this," he said.

Building for the future

Tesla management was extremely transparent about 2024's projected lack of growth in theearnings call However, there was a silver lining.

As they described it, Tesla is currently "between two major growth waves." The first one was primarily driven by the global expansion of its Model 3 and Model Y (the best-selling vehicle in the world last year). But now things are shifting.

Tesla plans on using this time to buckle down and prepare for a new period of growth that a handful of endeavors will drive. The most promising is autonomous driving. While its systems are yet to achieve the coveted autonomy levels of 4 or 5, at which point human drivers no longer need to be involved, Tesla made significant progress in 2023 and expects that progress to continue in 2024.

Another hoped-for driver of future growth is what management has dubbed the "next-gen" vehicle. In recognition that its vehicles are out of reach for most buyers, Tesla is in the beginning stages of designing and producing a vehicle that Musk hopes will cost only around $25,000. Admitting that his timelines are, at times, overly optimistic, Musk thinks the car could go on sale by late 2025.

The third component of Tesla's future growth is its humanoid robot, Optimus. The company aims for Optimus to be capable of replacing humans in dangerous or repetitive tasks, and it holds the potential to disrupt labor markets across several industries. Musk believes it will be a "revolutionary product" with the potential to exceed the value of all other ventures at Tesla. Management says shipments of the robot are expected to begin sometime in 2025.

A much-needed grain of salt

Due to Tesla's popularity and its position in the spotlight, any negative news about it is often exaggerated. The growth it experienced over the past few years is going to slow down. But are things spiraling out of control as they often are portrayed to be? Probably not.

Tesla is entering a new chapter, but not an unfamiliar one. Years ago, Tesla was refining and developing the foundations that later helped it catapult to the top of the EV industry. Now, a similar situation is unfolding. The only difference is that this time around, this phase will see it investing in technologies such as artificial intelligence and robotics.

At worst, Tesla belongs in "hold" territory as we wait and see how development progresses. But for those with some time on their side and a conviction that Musk will fulfill his goal of making Tesla the most valuable company in the world, the recent share price dip looks all the more enticing.

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RJ Fulton has positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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