/Tesla%20Car%20-7_OQMgoGzDw-unsplash.jpg)
Leading electric vehicle (EV) manufacturer Tesla (TSLA) has created massive wealth for long-term investors. Since its IPO in July 2010, Tesla stock is up a staggering 12,450%. However, in the last 15 months, a difficult macro environment has dragged TSLA stock lower by 60% from all-time highs, currently valuing the company at a market cap of $509 billion.
Will Tesla shares continue to outpace the broader markets over time, or will it underperform peers going forward? Let’s dive deep into the key trends and drivers that are likely to impact Tesla stock in 2023.
The Bullish Case for Tesla
The undisputed leader in the EV space, Tesla continues to grow at an enviable rate. Despite a challenging global economy, Tesla’s revenue was up 24% year over year at $23.3 billion in Q1 of 2023.
Tesla and its peers are currently wrestling with the unit economics of their EV programs due to elevated inflation, lower consumer spending, and rising interest rates. But Tesla is firmly focused on growing production, investing in autonomous vehicle software, and widening its product portfolio.
The much-awaited Cybertruck is in the tooling stage, while the Tesla Semi is in pilot production. Additionally, vehicles such as the Roadster and Robotaxi are in the development stage.
Tesla is also rapidly growing energy storage production capacity at its megafactory while executing its product roadmap. It's energy generation and storage revenue was up 148% year over year, while Services sales grew 44% in Q1 of 2023. Moreover, energy storage deployments rose by 360% to 3.9 GWh, the highest level of deployments achieved for Tesla. The supercharging vertical, which currently accounts for a small portion of total sales, is well poised to grow as Tesla opens up its network to include other manufacturers.
In Q1, Tesla produced a record number of vehicles due to the ramp-up at factories in Austin and Berlin. The Model Y was the best-selling non-pickup vehicle in the U.S. in the March quarter.
Tesla is confident about growing production capabilities and is in line with the 50% CAGR (compound annual growth rate) target it had outlined in 2021. In 2023, it expects to deliver 1.8 million cars, indicating a growth rate of well over 50%. Tesla ended Q1 with $22.4 billion in cash and $5.6 billion in debt, providing it with sufficient liquidity to fund its product roadmap, expansion plans, and other expenses.
While profit margins are under pressure in 2023, Tesla should benefit from economies of scale over time, allowing it to reduce the cost of operations. It also expects an acceleration in software-related profits driving overall margins higher.
The Bearish Case for Tesla
In addition to the current unstable economic environment, investors are wary of Tesla’s steep valuation, falling profit margins, and rising competition. As the demand for EVs is all set to explode in the next two decades, new and legacy manufacturers such as Lucid (LCID), Ford ((F), and NIO (NIO) have all entered this sector. There is a good chance for a rise in competition to result in a deceleration of top-line growth and lower profit margins for Tesla in the next few years.
While sales were up 24% in Q1, Tesla’s cost of goods sold fell by 42%, operating income fell by 26%, and earnings per share narrowed by 24% year over year. Tesla reported a free cash flow of $400 million, which was the lowest in the last two years. Further, its inventory levels also doubled compared to the year-ago period, indicating sluggish demand.
Tesla stock is currently priced at five times forward sales and 46.6 times forward earnings, which is quite steep, especially if profit margins move lower. Analysts expect adjusted earnings to fall by at least 13% in 2023.
The Final Takeaway
Tesla claimed while it implemented price reductions on several vehicles, the erosion in operating margins was manageable. It expects vehicle cost reductions, improved production efficiency at new factories, and lower logistics costs to offset falling gross margins.
Similar to how Apple (AAPL) benefits from a widening ecosystem, Tesla aims to increase sales per vehicle sold by focusing on ancillary services such as supercharging, software, and connectivity. Analysts tracking Tesla have a 12-month average price target of $205, which is 28% above its current trading price.
While its margins slumped in Q1, Tesla is among the most profitable auto manufacturers globally. This, coupled with Tesla’s huge economic moat and leadership position, make it a top long-term investment.
However, I believe at current prices, the stock is expensive. Besides having a very high price/earnings ratio of 47 (which is 6-7 times the corresponding multiples of internal combustion engine rivals), the company just announced it was reversing it's recently announced price cuts. This could hamper their growth, especially if there is a global recession. So I will continue to be patient and look to scoop up shares at lower prices.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
