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Electric vehicle (EV) manufacturer Tesla (TSLA) has created massive wealth for long-term shareholders over the years. The stock went public in mid-2010, and has since surged over 18,000%. Valued at a market cap of $762 billion, Tesla is also the most valuable EV manufacturer globally.
While Tesla has surged 90.9% in 2023, it trades 42% below all-time highs - and some analysts predict more downside ahead. Let’s see if investing in the EV stock right now is a good idea.
Tesla Battles a Challenging Macro Environment
In recent months, Tesla has been wrestling with a sluggish macro environment - including rising interest rates, elevated inflation, and supply chain disruptions, all of which have driven consumer demand lower.
In Q3 of 2023, it reported sales of $23.35 billion and adjusted earnings of $0.66 per share. Analysts forecast Tesla’s revenue at $24.1 billion, while earnings estimates stood at $0.73 per share. Tesla failed to beat Wall Street's revenue and earnings estimates for the first time since 2019.
While Tesla increased sales by 9% year over year, its earnings narrowed by 44% in Q3. Its product costs at new factories were higher than those at legacy manufacturing facilities, resulting in gross profits falling by 22% compared to the year-ago period. Moreover, it spent $1.16 billion in research and development (R&D ), an increase of almost 60% year over year as Tesla doubled the size of training compute for its artificial intelligence (AI) model.
These costs meant Tesla ended the September quarter with an operating margin of 7.6%, down from a margin of 17.2% in the prior-year period. While gross margins fell 18%, operating expenses rose by more than 40% year over year in Q3 of 2023.
A combination of rising costs, heavy investments in R&D, and other growth projects resulted in a decline of 74% in Tesla’s free cash flow, which stood at $848 million.
What Will Drive Tesla’s Stock Price?
Tesla enjoyed a first-mover advantage for several years, allowing it to lead EV production globally. But in the last few years, a slew of established automobile manufacturers such as Ford (F), General Motors (GM), Toyota (TM), and Volkswagen (VWAGY), along with new entrants including Nio (NIO), Lucid Motors (LCID), and Rivian (RIVN), have all entered this rapidly expanding market.
Despite an increase in competition, Tesla accounts for roughly 50% of the EV market in the U.S. and almost a fifth of global shipments. That said, the EV heavyweight has cut its vehicle prices in the last few quarters to accommodate a challenging economy.
Historically, Tesla stock was valued at a premium due to its robust growth in shipments and industry-leading profit margins. But as the bottom line has narrowed in the last two years, it's possible that Tesla’s valuation will be far more conservative going forward.
Tesla expects its Cybertruck to be the next key driver of revenue growth for the company in the upcoming decade. Moreover, deliveries of the Cybertruck were forecast to start by the end of this year, but are now projected to be a drain on Tesla’s cash flows in the near term.
Regarding the Tesla Cybertruck, CEO Elon Musk emphasized, “It is going to require immense work to reach volume production and be cashflow positive at a price that people can afford.”
What is the Target Price for Tesla Stock?
Analysts tracking Tesla stock expect sales to rise from $81.5 billion in 2022 to $109 billion in 2024. But adjusted earnings are forecast to narrow from $4.07 to $3.56 in this period. Priced at seven times forward sales and 67x forward earnings, TSLA stock trades at a premium.
Out of the 26 analysts tracking TSLA, seven recommend “strong buy,” two recommend “moderate buy,” 14 recommend “hold,” and three recommend “strong sell.” The average target price for TSLA stock is $237.68, which is marginally lower than the current trading price.
However, Roth MKM has a Street-low target price of $85, indicating a potential downside of 64% for Tesla stock. In a post-earnings note, analyst Craig Irwin reiterated that price target alongside a “hold” rating, and argued that TSLA's premium valuation appears to rest on the “specious assumption” that none of its competitors' EV models will gain traction over the next year.
