TSLA Stock: Should Investors Be Careful?

A significant amount of attention is now being paid to growth stocks. Once seemingly “sure winners,” this group of stocks has been hit hard by rising interest rates and concerns about continued valuation compression. Among the companies that’s seeing incredible selling pressure of late is Tesla (TSLA). Currently, TSLA stock is now down approximately 30% from its peak just a few months ago.

Accordingly, many investors may be concerned that this mega-cap stock could have more downside potential than its peers. Like many other top growth stocks, Tesla surged to a valuation many thought wasn’t possible. At its peak, TSLA stock was worth well in excess of $1 trillion.

Will this top EV player continue higher? Or will competition and other negative macro market forces take Tesla lower? Currently, I’m neutral on TSLA stock, given the uncertainty in the market right now.

Let’s dive into a few things investors should consider when looking at this EV player right now.

An Impressive Growth Story

Let’s start with some positives.

For one, Tesla has been one of the most incredible growth stories in the market over the past decade or so. Since going public, TSLA stock has seen gains of more than 20,000%. That’s right, this company has been a 200-bagger for investors who did nothing but sit on shares of this EV maker.

Much of this growth has come from impressive performance in leading the charge in driving EV adoption in North America and globally. Yes, Tesla’s EV sales currently make up a small fraction of global sales. However, long-term investors looking at this stock note the trajectory Tesla is on, and the potential for this company, should it maintain its market share.

That’s the big question. As we saw with the Super Bowl, a tremendous number of ads from other legacy auto manufacturers touting their own lineup of electric vehicles has some investors concerned about competition. The potential for margin pressures alongside negative macro forces isn’t a good thing. While Tesla has shown the strongest operating margin among its peers of late, right now, investors are questioning whether that’s sustainable over the long-term.

That said, this company’s sky-high growth rates in previous quarters is what most investors are focusing on. Those bullish on Tesla are likely to continue to pay more attention to delivery numbers and revenue growth than short-term metrics, at least for now.

How Does Tesla’s Growth Stack Up to Macro Forces?

Perhaps one of the biggest questions investors have about TSLA stock right now is how this company will be able to weather this existing investing environment. Rates are set to rise, alongside surging inflation. Rising rates means higher discount rates, a strong negative for growth stocks.

The good news is that Tesla has been reporting profitability for some time. This isn’t a stock that’s not earning anything. Rather, the company is plowing its profits back into its business, hoping to build a long-term leader in the EV space.

However, the market is respecting these macro forces right now, but while Tesla’s growth prospects appear to be robust, the key question is how much investors will be willing to pay for this future growth.

Skepticism among growth stocks, particularly among investors who look at the growth that various defensive sectors have provided, is likely warranted. Tesla’s valuation remains sky-high, and this is among the higher-risk stocks in the mega-cap segment, to be sure.

However, investors looking at the macro picture might also be assessing the direction the EV market is headed. The trends are very positive in this regard. It’s expected that in the U.S. alone, EV sales could grow to around 40 million units per year by 2030. For Tesla, the company leading the pack in terms of market share, these are very encouraging projections.

It’s certainly difficult to project what Tesla’s share of this future market will be. We’ve seen the rise of EV manufacturers such as Lucid (LCID) grab hold of investor attention in a very short amount of time. Tesla’s pure EV competition is heating up, and this company’s brand will certainly be put to the test.

Analysts on TSLA Stock

As per TipRanks’ analyst rating consensus, Tesla is a Moderate Buy. Out of 30 analyst ratings, there are 17 Buy recommendations, 7 Hold recommendations, and 6 Sell recommendations. 

This stock has an average Tesla price target of $1,107.50, implying an upside of 26.5%. Analyst price targets range from a high of $1,580 per share to a low of $300 per share.

Bottom Line

Tesla’s current valuation at around 180-times trailing earnings, and around 88-times forward earnings is high. Perhaps for this company’s growth trajectory, these numbers make sense. However, the caution with which investors are viewing the market right now is also worrisome for investors in all growth stocks.

Right now, it’s very difficult to gauge where Tesla’s fundamentals will be in a few year’s time. Accordingly, TSLA stock may be one for which that many simply choose to sit on the sidelines for some time.

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