Tesla (NASDAQ:TSLA) stock has fallen by over 70% during the past year. And on the first day of trading in 2023, it fell by 12%.
Despite the recent fall in value, the price is still 412% higher than five years ago. This is a perfect example of why investing should always be for the long term. A quality company should deliver a market-beating return over an extended period.
Even so, it’s hard to ignore the fact that in October 2021, the electric car maker had a market cap in excess of $1trn. At the time, this was more than the combined value of the next 10 biggest automotive companies in the world.
Today however, Tesla is worth ‘only’ $340bn.
Have the wheels come off?
There’s no doubt that electric cars are the way forward, which probably explains Tesla’s lofty valuation. The company was the first to scale up the use of clean technology to produce desirable vehicles. But now it seems that everyone in the automotive industry is doing the same. Car manufacturers have ditched the traditional square-box design, and now produce electric vehicles that people enjoy driving and are happy to be seen in.
Yet at first glance, Tesla still appears to be doing okay.
The company generated free cash flow of $3.3bn in the third quarter of 2022 and, at the end of September last year, had $21bn in the bank. Gross profit is increasing and operating expenses are under control. It has recently opened new factories in Texas and Berlin, and the company continues to invest heavily in new product development.
It produced a record number of vehicles in Q4, up 11% from the previous three months. But analysts expected a higher number (up to 25,000 more cars) which explains this week’s market reaction. More worryingly, this is the third successive quarter that the company’s production numbers have disappointed.
In an attempt to boost sales, it appears as though the firm is offering bigger discounts and other incentives. There are also supply chain issues affecting production in China.
Much of Tesla’s success can be attributed to the vision and enthusiasm of its founder Elon Musk. Investors will be hoping that he’ll be able to focus more on Tesla once a replacement CEO for Twitter has been found.
Should I buy?
Personally, I think the company is still over-valued. With a price-to-earnings (P/E) ratio in excess of 100, its shares aren’t cheap. But others appear to disagree.
According to Refinitiv, the median price target of the 41 analysts covering the stock is $250. This is more than double its current share price.
Although I have no doubt that Tesla will continue to be a pioneer in the electric vehicle (EV) industry, I’m not going to invest at the moment. I think I’ve missed the boat as far as getting rich from Tesla stock is concerned. I believe there’s more money to be made from investing in the precious metals that go into EV battery production, particularly lithium, nickel and cobalt.
Boston Consulting Group believes the shortfall of lithium is set to become “chronic“. By 2035, it forecasts that demand will outstrip supply by 24%. This means continued upward pressure on lithium prices. Right now, that seems like a better opportunity than investing in Tesla.
James Beard 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 2023