(Bloomberg) — Shares of Tesla Inc. have fallen so far, so fast, that some retail investors are stepping in and seeing a chance to buy what was once Wall Street’s highest-flying stock cheap.
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But would-be bargain hunters might want to take a closer look.
Even after this year’s record 65% drop, the electric-car maker’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 shares still trade at a higher valuation — relative to expected earnings — than most big tech giants, showing expectations for the company to experience the rapid growth promised by Chief Executive Officer Elon Musk and the industry in the coming years years will dominate.
In the near term, however, the company faces growing challenges, including rising costs, competitive threats and the risk that a recession will sap demand. At the same time, Musk has been distracted from his takeover of Twitter, a transaction that is weighing on the stock amid speculation he may sell more Tesla shares to keep the loss-making social media company afloat and take his attention away from the automaker’s leadership avert .
“Tesla was priced for perfection — and perfection is hard to come by,” said Catherine Faddis, senior portfolio manager at Fernwood Investment Management. “People are wondering why exactly it should be trading at so much premium?”
Such concerns fueled a major sell-off at Tesla, which drove shares down more than 36% in December, its steepest monthly decline since its 2010 IPO Windfall Rally boosted 1,163% by the end of 2021.
The story goes on
Electric cars will continue to be the future of the automotive industry worldwide. But Tesla’s near-term prospects have been clouded by economic developments and factors such as the rising cost of raw materials used in batteries. That prompted Tesla to raise prices this year as consumers grappled with rapid inflation and high interest rates. To clear its inventory, Tesla offered customers who took delivery by the end of the year a rare $7,500 rebate, effectively equivalent to a potential federal subsidy beginning in 2023.
Tesla faces delivery record despite demand concerns
The company also faces a growing competitive threat from big automakers that will flood the market with a slew of new electric vehicles over the next few years.
Despite this, stock markets are pricing in that Tesla will continue to grow rapidly, and brokerage analysts are broadly more positive on the company than a year ago, when 29% of them recommended selling the stock, putting it above $350 -Dollar held on data compiled by Bloomberg. Only 11% are doing so now that it has fallen to around $123.
Tesla shares are trading at more than 24 times their forward 12-month earnings, with GM and Ford fluctuating between 5 and 6 times. That reflects how much faster Tesla’s sales are expected to grow in the coming years: while GM and Ford’s sales are expected to grow in the low single digits in 2023, analysts expect Tesla to grow 36% .
However, fears that the company may be struggling with falling demand have grown in recent weeks after reports of year-end rebates and a temporary halt to production at its factory in China.
“There is risk in both pricing and volume,” said Ivana Delevska, Chief Investment Officer at SPEAR Invest. “Analysts are estimating volume growth of 50%, which is a stretch in an environment where consumer affordability is paramount.”
When Tesla slipped recently, some analysts scaled back their 12-month price targets, cutting the average by 13% to $247. Morgan Stanley analyst Adam Jonas was among them, reducing his call to $250 from $330.
But like those who bought the recent drop, Jonas remains bullish on the stock and maintains his overweight stance. His goal implies that the stock price could more than double in 2023.
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