Shares of Tesla (NASDAQ:TSLA) have been on a roller-coaster ride over the past year. Despite getting hit with a 30% haircut this year, the stock still finds itself up more than 370% off its pre-pandemic highs. The broader market sell-off has been unforgiving to the high-multiple growth stocks that doubled up many times in 2020 and 2021. Though Tesla has surrendered a portion of the gains, it’s unclear whether Elon Musk’s EV powerhouse will be able to continue bucking the trend as rates continue to rise.
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Tesla is executing, and its secular tailwinds seem strong enough to overpower a mild recession in 2023. Still, the stakes are incredibly high, and a modest quarterly fumble could see Tesla running itself off the treadmill.
Though Tesla’s stewardship has been nearly flawless, given the harsh environment, I think the easy money has already been made in the name. Further, potential negative catalysts beyond macro storm clouds may stand between TSLA stock and new highs.
Elon Musk’s execution is admirable, but investors must be realistic with year-ahead return assumptions on a stock that’s already doubled up many times over in just a few years. The valuation still looks stretched, in my opinion, with near perfection expected moving forward.
Tesla short-sellers have been proven wrong time and time again. It’s unclear as to whether they’ll ever be proven right. Regardless, valuation concerns are warranted. With so many Elon Musk fanatics and profound secular trends powering the name, there will surely be a wave of buyers on any pronounced plunges. I am neutral on the stock.
Can Tesla Stock Fight Off a Recession and Hungry Rivals?
Although I’m a believer in the economic profits to be had in the EV market, I think the recession will act as a serious road bump for Tesla. Further, competitive pressures could mount while auto demand looks to take a turn for the worst. Tesla has a profoundly-powerful brand that could help it hold its own over rivals. That said, few firms are immune to economic downturns, especially those in cyclical markets. The auto market is arguably one of the most cyclical out there.
For Tesla to hold its own through what could be a choppy 2023, it needs to continue out-innovating its peers. Cutting-edge innovation could allow Tesla to continue taking share, even as the EV space gets more crowded with time. Though Tesla’s tech prowess is respectable, the stock already has a tech multiple.
In a prior piece, I stated that Tesla’s tech multiple could be put into question as industry peers catch up. Indeed, EVs are exciting today, and it seems smart to bet on the pioneer. The same could be said about Netflix (NASDAQ:NFLX) and the streaming market five years ago. The streaming market has matured in a major way, and there are doubts about whether streaming stocks are worthwhile, given the spending required to keep users engaged.
Netflix may have been an exciting first mover, but rivals have caught up, and the stock has since suffered a vicious valuation reset. It’s no longer valued as an innovative high-tech stock; it’s valued more like a premier media company at just shy of 20 times trailing earnings.
Now, EVs are far more sophisticated than streaming. However, it’s unclear how Tesla will grapple with a wave of competition over the next five years. If rivals close the gap, Tesla could be in for a Netflix-like valuation reset from tech innovator to auto company. Various analysts covering the name have price targets that imply downside moves in excess of 50% from current levels.
Conversely, if Elon Musk can continue raising the bar, Tesla stock may never look back. There’s still a lot of market share for Tesla to take as it looks to dominate the roads of tomorrow. Further, the autonomy wildcard is another exciting development that could warrant an even higher-tech multiple.
At writing, TSLA stock goes for 13.4 times sales. If demand remains robust through a downturn, a considerable amount of multiple compression could be in the cards.
In any case, I’d much rather be in Ford (NYSE:F), an underdog in the EV space that trades at a far cheaper multiple. Ford has brand recognition built over the decades. However, Tesla seems to be “sexier” through the eyes of younger, more affluent consumers. As the two brands clash, it will be interesting to see how EV market dynamics change.
Is Tesla Stock a Buy?
Turning to Wall Street, TSLA has a Moderate Buy consensus rating based on 19 Buys, five Holds, and six Sells assigned in the past three months. The average Tesla price target is $314.58, implying upside potential of 14.2%. Analyst price targets range from a low of $126.65 per share to a high of $526.61 per share.
Tesla Stock Takeaway — Risks are Too High for Value Investors
Tesla stock has been far more resilient in the face of the tech-driven market sell-off than I would have thought. It has proven that it’s not just another pandemic-era house of cards waiting for a breeze to knock it over. Still, ongoing outperformance has caused certain analysts to place high expectations on the name for future quarters. As a result, the current valuation leaves little room for error, which makes it too risky for value investors.
