Shares of Tesla (TSLA) are starting to really warm up again, up more than 30% in July. Tesla’s impressive pace in the second quarter and the relief rally experienced by the broader tech sector fueled the rebound. Although the 57% rise in earnings was impressive, the valuation remains incredibly stretched. Additionally, investors may be underestimating the potential for a sharp decline as the global economy tips into recession.
Not to mention the incredible efforts of Elon Musk and his company, but 12.1x sales is simply too high a price for an automaker facing a wave of hungry rivals over the next decade. .
Recent comments from the Federal Reserve following another 75 basis point rate hike have appeased investors holding high multiple growth stocks. While the meeting could spark a relief rally in the most battered names, Tesla’s long-term roadmap could prove very bumpy.
Few companies, especially automakers, are immune to the effects of an economic contraction.
Tesla Stock Clocks in another impressive result
Tesla is making hits on profits a habit. The latest beat was fueled by higher average selling prices and strong vehicle deliveries. Demand for Tesla’s electric vehicle direct line does not seem to signal that a recession is on the horizon. Whether Tesla’s quarterly strength bodes well for the affluent consumer (who is less buffeted by inflation) remains to be seen.
Either way, Tesla seems to have the momentum of a freight train as we head into a period of economic gloom. The million dollar question is whether Tesla’s sales momentum can see it through this recession.
Tesla remains the king of electric vehicles, putting it on the right side of a powerful secular trend towards electrification that could stretch for many years to come. After such quarterly strength, it seems that the secular tailwinds are stronger than the economic headwinds.
A strong brand, impressive vehicle lineup and premium technologies have been differentiators that could act as a sort of moat around the company’s share of economic profits in the scorching electric vehicle market.
Revenues and margins seem to be on the uptrend. As Tesla’s superchargers continue to roll out across the country (and then around the world), a growing number of consumers will be ready to go electric with their next vehicle purchase.
Tesla stock: is it worth the higher price?
Despite the powerful secular trends, I don’t consider Tesla’s moat to be impenetrable. Tesla may be the leader in electric vehicles today, but it’s unclear if Elon Musk’s empire can hold the throne 10 years from now. As traditional automakers go electric and become more technological, Tesla stock could face a significant contraction in valuation multiples.
Alternatively, electrifying automakers – think Ford (F) – could be rewarded with substantial multiple expansion. I would say the first case is more likely. The argument for Tesla’s premium multiple is that the company is a tech company that makes automobiles rather than a car company with cool technology.
Sure, Tesla has some intriguing tech behind the hood, but are those features and functionality replicable by other automakers beckoning top tech talent? Most likely. The rules of the game are inevitable in the decade, and I would argue that Tesla may not be able to widen its lead over its competitors.
Tech titan Apple (AAPL) has been rumored to enter the automotive industry for quite some time now. Currently, the rumor mill points to an all-electric, self-driving vehicle that could launch in the latter part of this decade.
As one of the most innovative tech companies on the planet, an entry into the automotive industry could weigh heavily on Tesla’s economic moat. Apple has the brand and the technology to outshine almost any rival it chooses to fight for market share.
All it took was a simple change in its iOS operating system to wreak havoc on social media companies. Apple’s ad business is relatively small today, but this move could lay the groundwork for a bigger push in the future, perhaps once the metaverse goes mainstream.
Apple’s entry into automotive poses a major threat to Tesla, and I don’t think the threat is factored into current valuations. Sure, Apple is a long way from launching a car in many years, but when it does, Tesla’s best days may fall in the rearview mirror.
Wall Street’s view on Tesla
As for Wall Street, Tesla has a Moderate Buy consensus rating based on 18 buys, 6 holds and 7 sells assigned over the past three months. Tesla’s average price target of $872.28 implies modest upside potential of 3.5%. Analyst price targets range from a low of $73.00 per share to a high of $1,580 per share. (See TSLA stock forecast on TipRanks)
Remember: the valuation is too high compared to the risks
Tesla does almost everything right these days. As we enter a recession, it may be more difficult to continue to explode results. Additionally, competitive threats are poised to increase significantly over the next six years. Automotive rivals and tech companies could find themselves breathing Tesla’s neck. This does not bode well for the multiple rich.
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