While the broader tech sector seems to have found its footing for the most part, Tesla (TSLA, Financial) has been in free-fall mode, with shares adding another 4.3% to this year's losses on Wednesday's turbulent trading session. The stock is now down more than 62% from its $407 peak hit in last year's back half. Only time will tell if Tesla is in for a revisitation of January 2023 lows. Regardless, potential dip-buyers (or should I say falling knife catchers) should formulate a solid investment thesis if they want to have the mental fortitude to hold up against the volatility as well as the army of analysts that seem to be rushing to lower the bar on their price targets.
Like it or not, Tesla is still an incredibly expensive stock at a price-earnings ratio of 45.3 and a price-to-free-cash flow ratio of 32.7. Such a hefty price tag does not leave a lot of room for error. Arguably, the multiple doesn't leave room for anything other than a hefty surprise to the upside. For now, the negative momentum is considerable, and unless you see something that's not on the radar of Mr. Market, I think the risk/reward on Tesla may still be a tad too rich for value-conscious investors.
How can Tesla move past the wave of price cuts?
The recent wave of Tesla price cuts has weighed heavily on shares. Macro headwinds don't seem to be backing off anytime soon, either. Tesla's brand power is getting put to the test right now. As other electric vehicle makers invest heavily in their latest and greatest offerings, I think the competitive pressures could act as a bit of a longer-term overhang on margins and revenue growth that could linger well after the recent slate of rate-induced macro forces fades away.
Elon Musk has been a brilliant leader and played a pivotal role in getting Tesla the financing it needed to thrive. These days, he has a hand in too many pies; the CEO of one company already has a life-consuming job, being the CEO of multiple companies is downright impossible unless other people are actually doing the job under the radar.
It's a daunting task to offset all of the pressures that the auto sector is hit with in the face of a potential recession. Only time will tell how much Tesla's margins will thin. I think the recent price cuts are a troubling sign that may not be so quick to resolve. As shares continue to sink lower, Tesla shareholders' patience will be tested as sizeable gains are clawed back.
Charlie Munger (Trades, Portfolio) likes BYD over Tesla
There are a growing number of other EV stocks out there, and some of them have been around as long as Tesla. Let's navigate back to The Daily Journal's (DJCO, Financial) latest annual meeting. During the session, Charlie Munger (Trades, Portfolio) said that "it's ridiculous" how far BYD Co. (BYDDF, Financial) was ahead of Tesla in the Chinese market. Remarkably, Munger commented on how BYD hiked prices while Tesla lowered prices. I think BYD shows that Tesla's dominance can, in fact, be challenged. For now, Tesla remains the king of EVs in the U.S. But in 10 years down the road, it remains a mystery as to whether the company can remain at the top of its class.
Price cuts amid high levels of inflation can be incredibly painful. As the EV scene gets more crowded, Tesla will need to keep its foot on the gas. As EV peers attempt to catch up, Tesla will need to find a way to maintain or even add to its lead. Technological advancements (such as autonomous vehicles) could help Tesla reclaim its edge as artificial intelligence (AI) continues to take off.
Catherine Wood (Trades, Portfolio) remains bullish on Tesla, estimating shares could reach $2,000 by 2027
Though Munger may not be convinced to punch his ticket to Tesla on the dip, innovation investor Catherine Wood (Trades, Portfolio) remains as bullish as ever. As many other investors sour over price cuts and eroding margins, Wood is already focused on what could be coming next for the company.
Wood sees the robotaxi opportunity propelling Tesla shares to $2,000 in 2027. Undoubtedly, Tesla has been praised by many as a frontrunner in the autonomous vehicle race. The company has the AI capabilities and the data to make the magic happen. Whether AVs hit roads in Tesla's projected four years or further out remains the billion-dollar question.
Wood has always been a forward-thinking investor. There's a risk of being too forward-looking, though, especially as interest rates continue their climb. When it comes to such nascent technologies like AV capabilities, it's hard to put a date on a release. The next thing you know, a 2027 target could move to 2030 and beyond. For now, I'm skeptical about the robotaxi opportunity.
Final thoughts
Tesla is up against it as shares fall under their own negative momentum. Many analysts are revisiting their models and adjusting the numbers to the downside. That's not encouraging as raw material cost inflation and price cuts look to take a bite out of future quarters. Personally, I wouldn't try to be a hero right here. Robotaxis or not, I think the valuation of Tesla stock is just too high.
