Is Tesla Stock a Buy Now?

Stocks and market instability are inseparable, they are always present when you step into the trading realm. Even renowned success stories in the market, such as Tesla (TSLA 1.66%), a leading electric vehicle and technology company, are not exempt from these fluctuations.

In a span of only three years, Tesla has experienced significant fluctuations in its stock price. On three occasions, it reached new record levels before plunging by at least 25%. One such drop amounted to a staggering 75%, and Tesla is currently in the process of recuperating from it. Charlie Munger, the trusted associate of Warren Buffett, once advised investors to brace themselves for average outcomes if they cannot handle occasional market declines of up to 50%.

Tesla stocks are currently trading at a price that is 36% lower than their previous highest value. However, they have experienced a remarkable increase of 112% in the current year. Does this indicate that the stock is heading towards a new record, or should investors be cautious due to its rapid doubling in value within a few months?

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When assessing Tesla, investors frequently draw parallels between the EV manufacturer and other car companies such as Ford or General Motors. However, this comparison may not perfectly hold up. While all three companies are engaged in the production of vehicles which requires substantial investments and faces fierce competition, their performance differs. The figures below reveal that Tesla appears to excel in this area. Although generating only half the revenue of established car brands, Tesla surpasses them in terms of free cash flow and exhibits faster growth in its overall revenue.

However, Tesla excels in its strategic placement in numerous flourishing markets. For instance, electric vehicles (EVs) are more and more likely to dominate the industry in the future, and Tesla played a major role in popularizing them in the United States. It holds a substantial lead as the global leader in battery-electric vehicles (BEVs). This does not even take into account the upcoming models like Cybertruck and Tesla Semi. Notably, both Ford and General Motors are willing to pay Tesla for using its charging network, which effortlessly adds to Tesla's earnings.

Moreover, Tesla has established a presence in various promising industries for the next ten years, such as their widely recognized efforts in self-driving cars, clean energy and storage solutions, advanced artificial intelligence, and robotics. There are only a few companies that are involved in such a wide range of endeavors. Although not every project may succeed, Tesla's numerous attempts greatly enhance their chances of achieving a remarkable success.

It is important to balance positivity with doubt in order to maintain a practical mindset. Although Tesla has great potential for future growth, we cannot disregard the fact that their main focus is selling high-priced, luxury items to consumers. The willingness of people to spend money can directly impact Tesla's business, and there are certain indications that they might face difficulties in selling vehicles in the near future.

To begin with, it initiated various reductions in prices several months ago, and this has already had a negative impact on its profitability. Furthermore, as evidenced below, the stocks have consistently risen and now stand at a staggering $14.3 billion, an increase that has occurred over the last two years.

It can be said that this problem is of a temporary nature, and as the economy improves, individuals will likely start spending on new cars again in the future. However, considering the significant rise in stock prices despite this vulnerability, investors should take this into account before deciding to purchase shares.

Should You Buy Tesla Now?

Taking all of this into consideration, investors have the opportunity to assess the level of value that Tesla stock currently presents. Financial experts predict that Tesla's earnings per share for the entire year of 2023 will be approximately $3.50. This translates into a price-to-earnings ratio (P/E) of 75. Additionally, consensus estimates indicate that Tesla is expected to experience an average annual earnings growth of 25% going forward, resulting in a price/earnings-to-growth (PEG) ratio of 3.

In my opinion, anything above 1.5 is usually considered expensive, so this elevated ratio suggests that Tesla's stock is pricey despite its positive expectations for growth. Furthermore, the lack of clarity regarding profit margins, reductions in prices, and increasing inventory could put pressure on earnings growth. This potential scenario might negatively impact the stock, with no room for error at such a high valuation.

The future prospects of Tesla appear promising, and the stock has the potential to increase significantly in value over the next five or 10 years. However, at present, it is challenging to perceive the stock as an attractive investment option due to its current price.

Justin Pope does not hold any positions in the stocks mentioned. The Motley Fool holds positions in Tesla and recommends it. The Motley Fool also recommends General Motors, and suggests considering long January 2025 $25 calls on General Motors as well. The Motley Fool maintains a disclosure policy.