Key points
- Shares have been trending lower since the summer, never reclaiming their 2021 high.
- Investors have been spooked by poor margin prospects and tensions between leadership and the board.
- However, this is still Tesla, and a P/E ratio of 42 is almost too good to be true.
- 5 stocks we like more than Tesla
Perhaps there has never been such a divergence. While the tech-heavy Nasdaq index has risen nearly 10% since the first week of January, shares of the electric vehicle (EV) giant Tesla Inc NASDAQ:TSLA have fallen by more than 20%. And the worst part for Tesla investors is that it wasn’t just a flash in the pan, where the stock opened so low on the back of unexpected bad news. No, it’s instead a slow but steady drift southward since last summer in what increasingly looks like a downward trend from 2021 highs, as Tesla finds itself catching a cold as the EV winter arrives .
For a stock that seemingly could do no wrong for a long time, it’s an unfortunate turn of events, but one that shows that no company is immune to a dramatic change in its fortunes. Some of the major obstacles CEO Elon Musk and his company are facing include a weak margin outlook and ongoing price cuts amid stiff competition from China. A weak earnings report last month spooked investors, and there is still a lot of work to do to restore investor confidence.
Considering the upside potential
But for those of us on the sidelines, it begs the question at what point Tesla will become too cheap to ignore. We’re already seeing some of the heavyweight names in tech come to its defense, with the likes of ARK’s Cathie Woods acknowledging that it’s going through a rough patch right now, but also saying we’re close to seeing the bottom in its cycle. .
For Woods, there are simply too many tailwinds and key industry catalysts waiting around the corner for Tesla to remain unwanted. He cited autonomous taxi networks as an example of a new industry waiting to take off in the next few years and that Tesla is well positioned to capitalize on. There is every reason to think that we will see a strong rebound in margin performance as the company accelerates back into growth mode.
Wedbush’s Dan Ives has also come to Tesla’s defense in recent weeks. In particular, he pushed back hard at the bears who are walking around acting as if the evolution of electric vehicles is dead and over, writing in a note to clients that “we couldn’t disagree more with the ultra-negative narrative Tesla is building and forming a black cloud.” on stocks.” Like Woods, he doesn’t expect an immediate turnaround, with some sector-wide headwinds still to overcome, but long-term you almost couldn’t pick a better stock. By the end of the decade, Wedbush predicts that around 20% of all cars will be electric vehicles, with autonomous driving being an almost fundamental feature for consumers at that point.
Long-term prospects
Ives and his team reiterated their Outperform rating on Tesla shares late last month and gave them a new price target of $315. Considering Tesla closed at $184 on Tuesday evening, that’s an expected upside of about 70% and not to be despised. Piper Sandler’s team has also expressed optimism about Tesla’s long-term prospects and, just last week, reiterated its overweight rating on the stock.
For those of us considering a position, getting involved here will require an iron stomach and a desire to stick it out for a while. The recent round of price cuts has hurt the company’s margins beyond what many expected, and an ugly dispute is emerging between Musk and the board of directors over voting control. But for a stock that once had a four-digit price-to-earnings (PE) ratio, seeing it trading at a PE ratio of just 42 is almost hard to believe. With its shares back to 2020 levels and interest rates appearing to have peaked, we’re inclined to say these prices won’t last much longer. If you believe in the electric vehicle industry, then this might be the time to start backtracking.
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