Should You Hold Tesla (TSLA)?

These days, Wall Street isn’t too happy with Elon Musk.

Once insatiable demand for Tesla (TSLA) electric vehicles has evaporated.

In China, a key growth market, BYD has introduced competing vehicles with longer ranges and cheaper price tags.

That left Tesla’s Q1 deliveries down 8.5% against the prior year, its first YoY decline since 2020.

Shares tumbled more than 5% on the news, with the stock down almost 20% in the past month and over 30% year-to-date.

Yet, financial pros are eyeballing this stock in earnest, looking for a potential bottom, according to our TrackStar data.

But is this the spot to finally jump in?

Tesla’s Business

Elon Musk’s visionary leadership made Tesla the king of electric vehicles.

He and his company single-handedly changed the course of history through sheer determination and innovation.

Electric cars aren’t anything new. However, no one could make them affordable.

Musk was determined to change that.

Over a decade, he built Tesla from the ground up, creating a cult-like following of workers and consumers.

He asked his engineers to break everything down to its basic components and rebuild based on what was physically possible, not what had been done before.

Although Tesla briefly flirted with bankruptcy, the company is now the preeminent automotive manufacturer, with margins that surpass nearly every automaker.

Yet, Tesla’s ingenuity expanded into autonomous driving, adding an AI component to the business unmatched by anyone else.

Additionally, though only a small component of overall sales, Tesla sells energy generation and storage products as well as other related services.

Current production includes a limited set of models including the affordable Model 3, Model X, Model Y, Model S, and Cybertruck.

Lately, analyst concerns centered around declining margins and fewer deliveries.

Source: Tesla Q1 Earnings Report

Tesla’s amazing +25% gross margins of 2021 and 2022 gave way to +18% margins that could continue to fall.

However, the company has a cheaper compact model in the works for 2025 that could reinvigorate sales and margins.

Financials

Source: Stock Analysis

Tesla has commanded a premium valuation for years based on its profitability and breakneck sales pace.

That’s come into question as the appetite for electric vehicles has waned and competition has increased.

Right now, no one knows whether this malaise is temporary or permanent.

Unlike traditional automakers, Tesla’s margins give it room to cut prices to keep vehicles moving.

However, Musk also hopes to improve sales of services including Full Self Driving capabilities and other add-ons which are practically pure profit.

What most folks don’t realize is Tesla generates several billion dollars in free cash flow annually on top of the nearly $30 billion in cash on its balance sheet with less than $10 billion in debt.

This gives them incredible flexibility to adapt to changing market conditions.

Valuation

Source: Seeking Alpha

Compared to other automakers, Tesla is incredibly expensive.

Yet, none of the others can match Tesla’s growth or profitability.

And even at its premium valuation, Tesla’s price to cash flow is in line with Toyota Motors (TM).

Before the latest slowdown, Tesla expected to double sales every year or two.

Even if that takes a hiatus until 2025-2026, Tesla’s price to cash flow is fairly reasonable.

Growth

Source: Seeking Alpha

Despite its latest challenges, sales should still improve nearly 17% for Tesla in 2024. Only Nio (NIO) beats that estimate. However, it’s also smaller and unprofitable.

Traditional automakers will have to settle with 4%-8% YoY growth.

Profitability

Source: Seeking Alpha

We want to point out that Toyota Motors is the one other car company with margins that rival Tesla’s.

They’ve also been the slowest adopters of EVs. And their current margins are the best they can do.

Tesla, as its shown in the last few years, has a lot of upside.

Our Opinion 10/10

There is going to be a lot of volatility in Tesla over the next 2-3 years.

Yet, it’s the premier EV automaker with vehicles that can be affordable yet classy.

The introduction of a cheaper compact model will pave the way for a new wave of growth.

And if that’s not enough, all its autonomous driving technology, which is the best on the market, is effectively a bonus.

Elon Musk may get distracted on social media these days. But his vision for Tesla remains as strong as ever.