Shares of Tesla (TSLA 3.69%) have been revving faster recently. Since the business reported well-received third-quarter results on Oct. 23, the electric vehicle (EV) stock has soared by 62% (as of Nov. 25). The market’s post-election bump has certainly helped as well.
However, Tesla shares still trade 15% below the peak they established about three years ago. If you’ve been watching it from the sidelines, is now finally the time to buy Tesla stock?
Slowing growth
By disrupting the automotive industry with its slick and technologically advanced EV models, Tesla has grown into one of the world’s most valuable companies, currently sporting a market cap of $1.1 trillion. For years, investors were drawn to its rapid growth. However, its gains have slowed down dramatically.
Tesla reported automotive sales of $20 billion in the third quarter. While that figure was up 2% year over year, it was 6% lower than the fourth quarter of 2022. Growth has been hard to come by.
One issue dragging on its sales could be higher interest rates, which make buying new cars less affordable. Tesla’s vehicles are already on the premium end of the spectrum, so greater financing costs are another speed bump buyers have to navigate.
Intensifying competition is also making things difficult for Tesla. It’s no longer the clear single leader in the EV market. It faces stiff competition from international players, notably in China. And in the U.S., legacy automakers like Ford and General Motors are pushing their EV lineups.
According to Wall Street analysts’ consensus estimates, Tesla’s revenue will increase at a compound annual rate of 12.4% between 2023 and 2026. That would certainly be a less robust result than it has achieved in the past.
Autonomous future
Today, Tesla generates the bulk of its revenues from the sale of EVs, but its future could look vastly different. Eventually, it could be more of a software business that rakes in a high-margin recurring revenue stream from full self-driving (FSD) capabilities, asserts founder and CEO Elon Musk.
In early October, Tesla unveiled its CyberCab robotaxi. The ultimate goal is for the company to operate a worldwide fleet of them.
However, I still think there’s a lot of uncertainty around autonomous driving systems and whether or not they will be adopted on a grand scale. According to an early 2024 survey by AAA, 66% of drivers in the U.S. said they were fearful of self-driving vehicles, up from a 54% share who said the same thing in 2021. Even if Tesla can overcome the technical, legal, and regulatory challenges to wider full-self-driving adoption, hesitation about the technology among the general public may still get in the way.
However, Musk has positioned himself to be a major influence in the upcoming Trump administration, and this could result in a more favorable regulatory landscape for Tesla’s self-driving ambitions.
High expectations
Over the past five- and 10-year periods, Tesla’s stock has skyrocketed by 1,430% and 1,960%, respectively. Early investors who held on through its ups and downs along the way have been rewarded with gains that have crushed the overall market.
But I believe the company’s valuation has gotten further away from the reality of the underlying business. The stock’s steep price-to-earnings ratio of 93.1 reflects the market’s heightened optimism surrounding Tesla’s prospects. Investors are betting on the increasing likelihood that the business will not only introduce FSD technology, but be able to successfully monetize it on a global scale.
As a result, there are extremely high expectations for the company baked into its stock price right now. This leaves no margin of safety for prospective buyers. Taking everything into account, I don’t think Tesla is a stock worth buying.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.