Tesla (NASDAQ:TSLA) stock has fallen by more than 50% so far this year. But the EV pioneer’s profits doubled to $3.3bn during the third quarter against the same period last year.
What’s more, broker forecasts suggest that the group’s strong growth will continue into 2023 and 2024. Profits are expected to rise by around 40% next year, and by a further 25% the year after.
The combination of rising profits and a falling share price looks interesting to me. Should I consider buying this US stock for my portfolio?
Tesla’s vehicle production rate has risen by 50% over the last year. During Q3, the company produced more than 365,000 vehicles.
To put this in context, Stellantis (which owns brands including Peugeot, Citroen, Chrysler, Jeep and Vauxhall) produced 1,218,000 vehicles during the same period.
Tesla’s plan is to continue to increase production capacity by 50% each year. Right now, the company says it already has the factory capacity to produce 1.9m cars each year. Further expansion is under way.
Broker forecasts suggest that Wall Street analysts are backing CEO Elon Musk’s predictions. Their latest expectations suggest sales rising by 40% to $118bn in 2023.
Is Tesla stock cheap?
So, let’s look at valuation. The obvious option here would be for me to point out that Tesla’s market cap of £485bn is equivalent to the combined market capitalisation of car stocks Toyota, Ford, General Motors, Chinese group BYD (whose largest shareholder is Warren Buffett), Mercedes-Benz and BMW.
From this, I could suggest that Tesla is obviously overvalued. Unfortunately, I don’t think it’s right to resort to such simplification.
Tesla’s rapid growth is being backed by rising profits and good cash generation. Only one other company I’ve listed above — BYD — is delivering similar performance.
The European, Japanese and US firms I mentioned are all expected to report flat or falling profits over the next year or so.
Strong, profitable growth usually deserves a premium valuation. Although Tesla shares currently trade on 44 times 2022 forecast earnings, brokers expect this multiple to fall to 25 times earnings by 2024.
If Tesla’s rapid growth continues, I think the current valuation might be sustainable. But I’m not sure it’s cheap enough to buy.
What would I do?
A few years ago, there was hardly any competition for Tesla in the upmarket EV segment. However, that’s now changing fast.
Manufacturers such as BMW, Volkswagen and Mercedes-Benz are now producing classy and sophisticated electric cars. I suspect that many buyers may choose these models instead of a Tesla.
The firm’s management also concerns me. Chief executive Elon Musk appears to be distracted by Twitter at the moment, following his recent takeover of the social media firm.
My final worry is the share price. I don’t think the stock is crazily expensive these days. But I do still think that several more years of strong growth are already priced in.
If Tesla disappoints the markets at all, I think its shares could have much further to fall.
For me, the risks outweigh the potential rewards at the moment, so I won’t be investing.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022