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It’s been a very strong few months for the automaker. tesla (NASDAQ:TSLA). The electric vehicle specialist has seen its value rise by more than three-quarters so far in 2023. Despite that strong performance, Tesla shares are actually 48% below their level a year ago.
What’s going on? Should you invest, even after the recent rally?
History and foundations
Tesla is a high-profile company in strong growth mode. It has a market capitalization to match, approaching $600 billion.
I think the company represents an extreme example of what you see with a lot of stocks. Some investors get excited about what they see as the ‘story’ of a business: its potential. Others focus more on what’s known as fundamentals, or the hard data that captures current business performance.
In my opinion, both approaches have a role to play when valuing stocks. Especially for a rapidly growing company like Tesla, today’s business results are only part of its long-term opportunity story. However, they help bring a real world perspective.
Tesla’s stock has long reflected a dispute between investors who see it as overvalued due to its fundamentals (price-earnings ratio is over 50) and those who think its investment case is about the long-term story. .
Firing on all cylinders
One of the reasons that I think you’ve had a strong 2023 so far is that the fundamentals are actually getting closer to the long-term story.
Revenue last year grew more than 50%. The new production capacity, such as its German factory, should mean that production volumes can continue to grow strongly. After posting steady losses until three years ago, Tesla more than doubled its net income last year to $12.6 billion.
If it can sustain those growth rates, I think Tesla’s current price actually looks cheap. The company benefits from a strong brand, proprietary technology, a growing user base, and growing demand for electric vehicles.
However, growth can be expensive. Expansion could mean more capital spending eating into profits. The company has been cutting prices. That could hurt profit margins, but it still may not be enough to fend off growing competition as other automakers catch up with Tesla’s advantage in electric vehicles.
If earnings growth stalls or earnings fall, today’s valuation could be seen as expensive.
My move in Tesla
I am more tempted to add the firm to my portfolio than I have been for a while, even after its 2023 stock price jump.
The business model is now being demonstrated at scale. That could continue, boosting both revenue and profit.
However, I am still put off by the risks. The competition is growing rapidly. To deserve its current valuation, let alone a higher one, I think Tesla needs to continue to deliver very strong business growth. That is a difficult feat to manage year after year.
It could happen. But I’m more comfortable with the balance of risk and reward elsewhere in the stock market right now, so I won’t be buying Tesla stock.
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