Tesla (TSLA 0.23%) has taken its investors on a bumpy ride. Shares have skyrocketed a jaw-dropping 1,150% in the past five years, which trounces the gain of the Nasdaq Composite. But the journey has been extremely volatile; the electric vehicle (EV) specialist's stock currently sits 55% below its peak.
Investors are likely familiar with this "Magnificent Seven" stock. But is Tesla a smart buy right now?
Competitive strengths
With 2023 revenue of $97 billion, Tesla has become a leader in the EV industry. The company's meteoric rise since its founding in 2003 has created some key competitive strengths that investors should be aware of when looking at the stock.
There's no denying that Tesla has developed a strong brand. Its cars, known for sleek designs and innovative tech-enabled features, are popular among consumers. And this has allowed the business to historically charge high prices.
Tesla also possesses a cost advantage that lets it produce and sell its vehicles profitably. Credit goes to the company's focus on scaling up its manufacturing capabilities over the years.
A strong brand and cost advantages make up Tesla's economic moat. This is one important factor that illustrates a company's potential ability to fend off the competition over an extended period.
Just a car company
Despite possessing powerful competitive advantages, Tesla is proving that it's just a car company. This is a tough pill for the stock's most bullish supporters to swallow.
After sales rose 19% in 2023, a huge slowdown from prior years, they dropped 9% through the first three months of 2024. Part of the blame goes to interest rates that are much higher than they have been throughout most of the company's history. Higher borrowing costs naturally discourage consumers from buying a new car, which is usually the second-largest purchase a person makes in their life.
Competition is also fierce. Legacy automakers are investing in their EV ambitions. And EV car companies, particularly BYD, are also giving Tesla a run for its money. Consumers are faced with more and more choices.
To spur demand, Tesla has undertaken numerous price cuts. And margins have taken a major hit. This tells me that no matter how innovative its cars might be, or how much of a lead the business has in the U.S. market, it's not immune to macro and industry headwinds.
Paying a premium
But Tesla still trades at an expensive valuation. The stock sports a price-to-earnings (P/E) ratio of 47. This represents a 47% premium to the 32 P/E multiple of the tech-heavy Nasdaq-100 index.
This steep valuation comes after shares have tanked. They trade 55% below their all-time high, reached in November 2021. Tesla is the clear laggard when it comes to the Magnificent Seven constituents.
Some investors might view the dip as a lucrative buying opportunity. However, I believe the market is placing a premium on Tesla's business. The valuation still prices in the hopes that the company can achieve its ambition of one day launching a global robotaxi fleet. Or maybe the market thinks Tesla will generate huge revenue from the sale of humanoid robots or from further penetrating the energy sector. These things are unpredictable from today's perspective. Consequently, they probably shouldn't be reflected in the stock price.
Tesla's co-founder and CEO, Elon Musk, also tends to get the benefit of the doubt, even though he has constantly overpromised and underdelivered when it comes to the company's timeline on various products including fully autonomous driving capabilities. As a result, Tesla remains a story stock, and an overvalued one at that. Investors should avoid buying shares right now.
