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Is Tesla Finally a Buy After Declining 43% From Its Peak?

Tesla (NASDAQ: TSLA) has been one of the biggest wealth creators in the last five years. Led by its visionary CEO Elon Musk, the electric car maker evolved from an almost bankrupt company to one of the most valuable companies on the planet.

Early investors (and believers) have reaped enormous gains over the years as Tesla's stock price rose from around $70 five years ago to $711 (as of writing), turning every dollar invested into ten dollars. While early joiners profited, latecomers always look for the opportunity to buy the stock, preferably during a market correction.

As Tesla stock has corrected by more than 40% lately, is it finally the time to buy the stock? Let's explore further.

Image source: Getty Images.

Tesla's economic engine is firing on all cylinders

Tesla has been on a winning streak lately. Five years ago, it generated $7.0 billion in revenue and a net loss of $674 million. In 2021, revenue reached $53.8 billion , while net profit reached $5.5 billion. A significant turnaround for a company that was once on the brink of bankruptcy!

In the first quarter of 2022, the EV (electric vehicle) manufacturer delivered another solid set of numbers. Vehicle delivery reached a record 310,048 , up 68% year over year. Revenue grew 81% year over year to $18.8 billion, and net profit jumped more than sixfold to $3.3 billion.

Tesla also generated a solid free cash flow of $2.2 billion in the quarter and ended the quarter with a fortress balance sheet -- cash, cash equivalents, and short-term marketable securities reached $18 billion . It also eliminated almost all its debt (excluding vehicle and energy product financing), with only $0.1 billion left on its book.

Tesla benefited enormously from the rapid adoption of EV vehicles in the last few years. And as this trend intensifies, this top dog is well-positioned to grow its business for many years.

But the external environment is becoming very challenging

Tesla has been executing well. And thanks to acceleration in the trend toward EV, the tech company is at the right place at the right time to ride this external tailwind.

While EV adoption will continue to rise over time, the path will be anything but smooth. In the short to medium term, two major external forces could slow this trend. The first one is the high inflation we see globally. For example, in the U.S., the U.S. Bureau of Labor Statistics reported that the inflation rate was 8.6% for the 12 months ending May, the highest since December 1981.

A higher inflation rate means citizens have to pay more for basic needs like food and energy, leaving them less cash to spend on discretionary items. Naturally, they would postpone buying high-price durable goods like houses and cars. It didn't help that Tesla raised its prices multiple times this year to cover its higher material and operating costs.

To add salt to the wounds, the Federal Reserve has been increasing interest rates this year -- with more expected in the coming months -- to fight the surging inflation. A higher interest rate will further impact affordability since most people rely on borrowings to fund big-tag items like houses and cars.

In short, these headwinds could impact Tesla's vehicle sales. Investors should monitor the company's performance for any early signs of trouble in the coming quarters.

Is Tesla a cheap stock now?

Tesla has not been a cheap stock of late. In the last two years, the company price-to-sales ratio (PS) has traded between 6 and 30 . At $711, the stock sells at a PS ratio of 12.9.

On one level, Tesla's stock valuation is currently at the lower end of its range for the last two years, especially after its recent stock price correction. But if we extend our horizon further, Tesla stock has traded as low as 1.4 times and averaged 9.9 times PS ratios, respectively, in the last five years. At today's 12.9 times PS ratio valuation, Tesla stock is still trading above its five-year average.

Besides, if we then compare Tesla's valuation to that of its peers, for example, Ford Motor, Tesla seems to be on a different planet altogether. Ford's PS, price-to-book (PB), and price-to-earnings (PE) ratios are 0.3, 1.0, and 4.0. Comparatively, Tesla's ratios are 12.9, 21.6, and 96.2.

Though Tesla stock is cheap today compared to its prices for the last two years, it is by no means cheap relative to its extended history and peer.

Final verdict

It's not difficult to see that Tesla has been improving over the years. And with the world just moving into EV, this top dog is solidly positioned to grow its business over time.

Yet, I find Tesla's valuation remains too high for my taste. Buying at today's price offers investors little margin for error, especially when global economies are mostly heading toward a down cycle.

I prefer to err on the safe side and remain on the sideline for now.

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Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.


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