(Bloomberg) — Tesla Inc. shares have fallen so far, so fast, that some investors are piling in, seeing a chance to pick up what was once Wall Street’s highest-flying stock on the cheap.
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But potential bargain hunters may want to take a closer look.
Even after this year’s record 65% drop, the electric carmaker’s meteoric rise in 2020 and 2021 has given it a market value of $389 billion, more than Toyota Motor Corp., General Motors Co., Stellantis NV and Ford Motor Co. combined.
And the stock still trades at a higher value – relative to expected earnings ̵[ads1]1; than most major tech giants, showing expectations that the company will see the explosive growth that CEO Elon Musk has promised and dominate the industry for years to come.
In the short term, however, the company faces increasing challenges, including rising costs, competitive threats and the risk that a recession will slow demand. At the same time, Musk has been distracted by his takeover of Twitter, a transaction that has weighed on the stock because of speculation that he could sell more Tesla shares to keep the money-losing social media company afloat and take his eyes off leading the automaker. .
“Tesla was priced for perfection — and perfection is hard to come by,” said Catherine Faddis, senior portfolio manager at Fernwood Investment Management. “People are asking themselves, why exactly should it be trading at so much of a premium?”
Such concerns led to a big selloff in Tesla that drove shares down more than 36% in December, the steepest monthly decline since its 2010 IPO. That gave short sellers who had bet against the stock after two years. rally pushed it up 1.163% by the end of 2021.
Electric cars are still expected to be the future of the automotive industry globally. But Tesla’s near-term outlook has been clouded by the trajectory of the economy and factors such as the rising cost of raw materials used in batteries. That led Tesla to raise prices this year just as consumers struggled with rapid inflation and high interest rates. To clear inventory, Tesla offered a rare $7,500 discount to customers who took delivery by the end of the year, effectively matching a potential federal grant starting in 2023.
Tesla poised for delivery record despite demand concerns
The company also faces a growing competitive threat from major automakers that are slated to flood the market with a slew of new electric cars over the next few years.
Despite that, the stock market is pricing in Tesla’s continued rapid growth, and brokerage analysts are broadly more bullish on the company than they were a year ago, when 29% of them recommended selling the stock when it held above $350, according to to data collected by Bloomberg. Only 11% do now that it has fallen to around $123.
Tesla shares are trading at more than 24 times the estimated 12-month forecast, with GM and Ford at between 5 and 6. That reflects how much faster Tesla’s sales are expected to increase in the years ahead: While GM and Ford’s 2023 earnings are expected to grow by low single digits, analysts see Tesla registering 36% growth.
Concerns that the company could struggle with eroding demand have grown in recent weeks, however, amid news of year-end cuts and a temporary production shutdown at its factory in China.
“There are risks to both pricing and volume” for Tesla, said Ivana Delevska, chief investment officer at SPEAR Invest. “Analysts estimate 50% volume growth, which is a stretch in an environment where affordability is the focal point for the consumer.”
As Tesla fell recently, some analysts reset their 12-month price targets, dropping the average 13% to $247. Morgan Stanley analyst Adam Jonas was among them, cutting the call to $250 from $330.
But like those who have bought the recent decline, Jonas remains bullish on the stock and maintained his overweight rating. His goal means that the share price can more than double in 2023.
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