Tesla Stock (NASDAQ:TSLA)
After Tesla’s (NASDAQ:TSLA) valuation increased by more than 100% between January and February 2023, I advised investors to sell the EV company’s stock because there was an obvious risk of an overheating stock price surge. However, Tesla’s shares have encountered significant selling pressure in recent days as a result of the company’s Q1’23 results announcement and Elon Musk’s statements about potential EV price drops. These reductions may result in long-term market share gains, but they may also result in lower operating income margins… which continued to shrink in Q1’23. I feel that new market anxieties regarding Tesla provide an excellent unique entry point into Tesla stock at a much more appealing valuation.
Tesla’s Results for the Q1 23 Are Disappointing
Tesla reported $0.85 per share in adjusted earnings per share for the first quarter, meeting forecasts, although the EV manufacturer fell short on revenue. The earnings announcement resulted in a 10% decline in share price, which I am taking advantage of.
If Tesla continues to decrease pricing in order to boost demand and revenue growth, operating margins may continue to decline.
One big issue that Tesla is now facing is that the EV firm is aggressively cutting product costs in order to stimulate demand, which is a hazardous strategy that may backfire if other EV manufacturers follow suit and aggressively lower EV pricing as well. Elon Musk recently commented on Tesla’s pricing policy, implying that the company may decrease prices more in order to increase revenues.
Revenue growth is critical for Tesla because the firm is primarily viewed as a growth stock. Tesla’s sales growth has slowed after peaking during the pandemic: total revenues reached $23.3 billion in Q1’23 or a 24% increase.
Tesla is profitable and an industry leader, thus it can afford to sacrifice short-term profits. The EV firm reported $2.5 billion in net income in the first quarter, a 24% decrease year on year. However, due to Tesla’s aggressive pricing policy, which saw the 6th wave of the recent price reductions immediately before earnings, the EV company’s short-term profitability prospects could be harmed further. Tesla reduced the Model Y and Model 3 pricing by 6% and 5%, respectively. Tesla’s margins are also at risk if this plan is implemented: the company’s GAAP gross margin fell from 29.1% in the prior year to 19.3% in Q1’23, a drop of over 10 percentage points.
Tesla’s operating margins declined over 8 percentage points year over year to 11.4%, and I see significant margin concerns for Tesla if Elon Musk continues to press for price decreases.
When compared to the rest of the auto industry, Tesla’s operating margins remain strong. They also increased rapidly beginning in Q1’20, as Tesla hit critical mass and accelerated the ramp of its Model 3 and Model Y, two of the company’s most popular EV models globally. The auto industry as a whole is looking at average operating margins.
Tesla Is Once Again Attractively Valued
I must admit that I got lucky when I advocated selling Tesla in February for $204. However, the 10% decline in share price on Thursday appears overblown to me, and I have purchased the drop again at $165, thereby restarting a new stake in the EV firm. I feel the value is appealing, owing primarily to Tesla’s relentless focus on growing revenues, which may rise much faster than the current consensus suggests.
Analysts presently expect that Tesla will generate $100.4 billion in sales in the fiscal year 2023 and $131.0 billion in the fiscal year 2024, representing a 30% year-over-year growth rate. Tesla is predicted to increase revenues by 23% in FY 2023, thus analysts anticipate an acceleration of growth due to the ongoing scaling of Tesla’s Model 3 and Y production, as well as the commencing ramp of the Cybertruck, which is expected to hit the market in the middle of FY 2023. However, because Tesla is adopting an aggressive price strategy, sales could climb much faster than the 30% growth rate predicted by analysts’ top-line predictions.
Tesla is priced at 4.0X FY 2024 revenues, but investors are currently getting a 39% discount on the company’s 1-year average P/S ratio. Within the last year, Tesla achieved a P/S ratio as high as 10.4X, I believe shares have significant re-rating potential once investors are ready to move on from the price decrease news.
Despite a somewhat higher P/S ratio when compared to other US-based EV firms, Tesla remains the greatest deal in the sector in my opinion. This is due to the EV company’s unrivaled size and scale, and Tesla has already generated significant net income profitability. Other companies, such as Lucid Group (NASDAQ:LCID) and Rivian Automotive (NASDAQ:RIVN), are still in the early stages and have negative earnings and free cash flow.
Tesla’s Risks
The most significant commercial risk for Tesla right now is that its operating margins will continue to deteriorate in order for the business to spur sales growth and acquire market share. This could be a risky strategy for the corporation, especially if other EV manufacturers follow suit and decrease their product pricing, resulting in an expanding price war in the EV category, where margins are already thin. Tesla is the world’s leading EV brand, but lower margins are unlikely to please investors and may ultimately harm Tesla’s profitability.
Bottom Line
Investors, I believe, should view last week’s 10% price decline as a fantastic buying opportunity now that investors have become more fearful. While Tesla will pay for higher revenue growth with lower profits in the medium term, it could be a successful strategy to boost electric vehicle demand and hence win market dominance. Because Tesla, unlike many other EV start-ups, is currently profitable, the business can afford an aggressive pricing plan. Since Tesla stock has plunged again and worry has damaged the market, I feel this 10% decline is a new opportunity to capitalize on this fear. When the market goes highly optimistic about the EV company and investors are ecstatic, I will sell shares of Tesla once more.
Featured Image: Unsplash @ Bram Van Oost
