3 Things You Need to Know if You Buy Tesla Today
Thanks to its innovative vehicles, disruptive focus, and visionary founder and CEO, Tesla (NASDAQ: TSLA) is a business that seems to always be in the spotlight. This has become one of the world's most valuable companies, now with a market cap of $692 billion.
But investors aren't too pleased because the shares are currently trading 46% below their peak price from Nov. 21. Before you decide to add this top electric vehicle (EV) stock to your portfolio on the dip, here are three things you need to know.
Tesla's recent financials
Tesla reported its second-quarter 2024 (ended June 30) financials not too long ago. Based on the stock's double-digit percentage dip, the market clearly wasn't pleased. This marks another quarter of disappointing performance from the EV leader.
During the three-month period, Tesla posted automotive revenue of just under $20 billion. That represented a worrying 7% year-over-year decline. Shareholders accustomed to seeing monster growth weren't expecting this result.
There are two primary reasons for Tesla's challenges. One relates to the macro picture. Higher interest rates simply make buying new cars less affordable for consumers due to higher monthly payments.
The other reason is specific to the auto industry. While Tesla might've been the only compelling EV option on the market for a long time, these days there are numerous competitors trying to stand out. So Tesla has had to cut prices to drive demand. This has the added impact of crushing profitability.
Tesla's huge ambitions
Tesla's recent financials demonstrate a business that resembles other car companies, which must deal with intense competition and economic forces. For the stock's most bullish supporters, this might be an unwelcome realization.
Founder and CEO Elon Musk, who is the richest person in the world, said on the Q1 2024 earnings call that Tesla "should be thought of as an AI or robotics company." This points to the business's lofty ambitions for what it one day hopes to become.
Perhaps there's no bigger goal for Musk and Tesla than to launch a global fleet of robotaxis. Turning every Tesla vehicle into a driverless ride-sharing machine can potentially generate lots of high-margin revenue for the business. Musk believes this service will have "quasi-infinite demand." Famed investor Cathie Wood feels the same way.
But in typical fashion, Tesla's introduction of full self-driving capabilities continues to be delayed. A planned robotaxi event scheduled for August got pushed back to October. And while Musk believes Tesla will start testing these rides next year, it's easy to be skeptical. Besides solving the immense technical hurdle, further down the line the business will ultimately run into regulatory and consumer confidence issues.
It also might not help Tesla's plans that tech juggernaut Alphabet announced a fresh $5 billion investment in its Waymo division that can further boost its autonomous driving technology.
Tesla is a story stock
Even as shares trade well off their peak, Tesla undoubtedly remains a story stock due to Musk and his lofty ambitions. Shares still trade at a steep valuation of a price-to-earnings ratio of just under 62. This clearly indicates that the market values Tesla not for what its business clearly is today, which is a struggling car manufacturer, but what it could become at some point in the future.
According to consensus Wall Street analyst estimates, Tesla is projected to increase revenue and adjusted earnings per share by 12% and 12.5%, respectively, between 2023 and 2026. While forecasts should always be taken with a grain of salt, I don't believe that muted outlook warrants such an expensive multiple.
Investors who are considering buying Tesla shares are now familiar with the latest financial data, Musk's long-term goal, and the current valuation, all critical pieces of info needed to make an informed decision.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Tesla. The Motley Fool has a disclosure policy.
