The recent tech stock sell-off is picking up steam. After reaching a high of 16,212 points last year, the Nasdaq Composite has fallen by more than 12% to 14,149 points (as of this writing).
The market correction going on over the past several months has spared no company, not even Tesla (TSLA 0.54%). The investor darling has lost more than a quarter of its all-time-high market capitalization since early November.
With Tesla's stock price down, some investors are wondering if they should take this opportunity to load up on shares. But should they? Let us explore further by looking at the pros and cons of buying Tesla's stock right now.
Image source: Getty Images.
What the bulls are saying
As a company, Tesla is on fire. After delivering a record production of 237,000 cars in the third quarter of 2021, the EV maker ramped up production to reach yet another record -- 306,000 cars delivered in the fourth quarter of 2021. The company ended the year with a solid 83% year-over-year growth in production to just slightly below 1 million cars.
Alongside its strong operational performance, Tesla also delivered its second profitable year under generally accepted accounting principles (GAAP) and free cash flow of $5 billion -- and that was after spending more than $11 billion in capital expenditures. That's a good set of numbers considering the company flirted with bankruptcy a few times in its early days. Thanks to its much-loved electric vehicles (EVs), and the leadership of its one-of-a-kind CEO, Elon Musk, Tesla is gradually becoming the iconic company the bulls envisioned.
While Tesla is pumping out a record-breaking number of EVs -- management expects delivery to grow at an average annual rate of 50% over the next few years -- Elon Musk is not satisfied with just being an electric car manufacturer. He is betting that other projects like the autonomous car, ridesharing, renewable energy, and most recently, the humanoid robot that helps humans perform repetitive tasks will help sustain Tesla's long-term growth.
In short, Tesla aims to keep delivering blockbuster growth for the foreseeable future. And with Musk at the helm, the sky seems to be the only limit for the company.
What the bears are sniffing out
The bulls are excited about all the great things Tesla could do in the future. Still, if we put all its grand plans aside, Tesla is first and foremost an automobile company (at least for now) and will need to face all the challenges in this industry.
For one, the automobile industry is a notoriously tough industry to operate in, with intense competition. Tesla may have a lead in the emerging EV market, but there is no guarantee that incumbents and newcomers cannot catch up. For example, BYD recently sold around 93,000 electric cars in China in December 2021, which is not far from Tesla's average monthly sales of around 102,000 in the fourth quarter of 2021. In the United States, companies like General Motors and Ford Motor Company are all ramping up their EV car production as the trend toward electrification is picking up steam. In other words, competition will inevitably intensify over time.
On top of that, Tesla's stock is trading at a significant premium as compared to its peers. For perspective, Tesla's stock trades at a price-to-sales (P/S) ratio of more than 22 while GM's stock trades at less than 1. The bulls argue that Tesla's stock deserves a premium thanks to its prospects. That's an age-old argument even the bears come to agree with now, at least to a certain extent. Yet, this begets the following question: Does the stock deserve such a steep premium? Probably not.
Many factors can cause Tesla's high valuation to contract. To start, the bulls may change their mind on the car maker's prospects -- after all, most of Tesla's futuristic plans are still works in progress. Likewise, there is no guarantee that Tesla can continue to execute its operation well -- a recent recall involving repeated use of the front trunk lid inadvertently causing the rearview camera to fail is an example of what can happen.
So is Tesla a buy now?
Tesla is a one-of-a-kind company led by a visionary CEO. Still, it is unlikely that I would buy the stock right now.
I believe the stock remains exceedingly expensive, even after its recent price decline. The bulk of Tesla's current market capitalization depends on Musk executing flawlessly in the coming years in growing its existing EV business and in delivering on other promises like robotaxis and autonomous vehicles. That is way too much to expect from the company. The bulls who have such high expectations are positioning themselves for potentially huge disappointments.
So unless you are a risk-taker or a diehard Tesla fan, it will be prudent not to wager your hard-earned cash on the stock. At least, not at its current valuation.
