- Tesla’s decline this year can be attributed to a number of headwinds, some cyclical and some company-specific.
- The biggest threat is a potential slowdown in demand as consumers shy away from impulse purchases.
- But after losing 50% since the beginning of the year, some analysts are starting to call for a buy on the stock.
Tesla (NASDAQ: ) shares have been on a slippery slope this year. The world’s largest electric car maker has lost 53% of its market value, or about $530 billion, since reaching $1 trillion in market capitalization in April. Losses since the beginning of the year have been close to 50%.
After this sharp and sustained decline, some analysts believe Tesla stock is too cheap to ignore. This year’s decline has left the stock trading at 31 times forward earnings at the start of 2021, down more than 200 times.
In a note today, Morgan Stanley said Tesla is approaching a “bearish” price target of $150, an opportunity for investors to buy the stock on the cheap. Similarly, analysts at Citi put the company at sell-neutral, saying the more than 50% decline this year “balances the risk/reward ratio in the short term.”
Those bullish comments were echoed in an Investing.com poll of 38 analysts, with a 12-month price target of 59% upside potential.
But before betting on Tesla, it’s important to understand why the automaker has lost investor confidence despite its clear dominance in this field. Tesla’s decline can be attributed to many headwinds, some cyclical and some company-specific.
A slowdown in demand
The biggest threat is a potential slowdown in demand after central banks around the world embark on an aggressive monetary tightening campaign that raises the risk of recession. That, combined with inflation near its highest level in four decades, supply chain issues and China’s strict COVID policies, makes it harder to sell cars to consumers who are cutting back on their discretionary purchases.
Even Tesla CEO Elon Musk acknowledged the threats during last month’s earnings conference call, saying it was “a little more difficult” to meet demand due to economic slowdowns in China and Europe and interest rate hikes by the Federal Reserve. Tesla has already cut prices in China, and it won’t be surprising if the company cuts even more in the coming weeks.
In addition to these macro issues, Elon’s acquisition of Twitter (NYSE: ) also affects the company’s stock price. Investors fear the billionaire’s deep involvement in revamping his social media business could dilute his focus and hurt Tesla’s competitive advantage.
Tesla, whose Twitter deal was finalized and Musk is CEO, has lost more than $300 billion in market capitalization in the past two months.
Wedbush’s Dan Ives, one of Tesla’s most bullish analysts, dropped the automaker from his best ideas list, saying Musk was “darkening” Tesla’s history and its stock in turn. His continued selling of Tesla stock to raise enough money for the Twitter deal created a “vicious cycle” for investors, resulting in an “albatross.”
Despite all these setbacks, Tesla remains the dominant electric car brand in the U.S. and abroad, and its long-term value is hard to ignore.
Putting aside the short-term economic turmoil and negative PR of Musk’s Twitter experience, here’s a company well-positioned to benefit from the global shift to electric cars and clean technology.
Source: EV Volumes
Just over half of all passenger cars sold in the U.S. will be electric by 2030, thanks in part to consumer incentives included in President Joe Biden’s $374 billion in new climate spending, BloombergNEF reports. Tesla is the only EV manufacturer that has reached the size necessary to satisfy this mass market.
Tesla finished upgrading production lines at its Shanghai factory in September to double the plant’s annual output to one million vehicles. The company is also expanding production capacity in Europe, where incumbent automakers including Volkswagen (ETR:) and Mercedes Benz (OTC:) have struggled to grow enough to compete with Tesla.
Emphasizing this strength, Deutsche Bank said in its latest note:
“We see 2023 as an important year for Tesla, during which it will continue to rapidly increase volumes, enter new segments with the Cybertruck and Semi, optimize its production and cost footprint, and benefit from the IRA (Inflation Reduction Act). which will reduce its costs and stimulate demand.
Bottom line: Is it time to buy Tesla stock?
There’s no doubt that Tesla is a highly volatile stock and not for investors with a low risk tolerance. However, if you believe in the titanic change that is about to take place in the transportation industry, then there is no point in avoiding Tesla.
The current weakness in the stock presents an interesting entry point if you want to move now.
Disclosure: At the time of writing this article, the author does not own Tesla stock. The views expressed in this article are solely those of the author and should not be construed as investment advice.