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After delivering game-changing returns to shareholders since its initial public offering (IPO), electric vehicle (EV) market leader Tesla (TSLA) has trailed the broader markets by a wide margin in the last three years. Tesla stock touched all-time highs in November 2021, and has since underperformed significantly.
While major equity indices are hovering close to record levels, Tesla stock is down 44% from all-time highs, valuing the company at $740.1 billion by market cap. Let’s see if investing in the EV manufacturer is a good choice right now.
Tesla Tanks After Q2 Results
Shares of Tesla fell 12% on July 24 following its Q2 results, after the company reported revenue of $25.5 billion and adjusted earnings per share of $0.52. Comparatively, analysts forecast sales at $24.77 billion and earnings at $0.62 per share for the June quarter.
While sales rose by 2% year over year, automotive revenue was down 7%. Tesla’s automotive sales include revenue from regulatory credits, which more than tripled to $890 million.
In the last two years, Tesla has been wrestling with slowing sales and rising competition, primarily from Chinese manufacturers. Moreover, it is impacted by macro headwinds such as inflation and high interest rates, both of which are weighing on vehicle demand and consumer spending. To offset sluggish demand, Tesla was forced to reduce vehicle prices and offer discounts or incentives, negatively impacting its bottom line.
Tesla’s operating margin shrank to its lowest level in three years falling to 14.4% from 18.7% in the last 12 months. It was the fourth consecutive quarter where Tesla’s operating margin has narrowed, despite lowering the headcount by 10% in the past year.
Can Tesla Stage a Turnaround?
Tesla is currently the largest EV maker in the U.S., but continues to lose market share to new and legacy players, including Ford (F), General Motors (GM), and Lucid Motors (LCID). Investors are banking on future developments that might allow Tesla to regain a foothold in this expanding addressable market. For example, Tesla might launch a lower-priced mass-market vehicle next year to drive sales higher, and help it enter new markets in emerging economies.
However, the major needle-mover for the EV giant may be the upcoming Robotaxi event, expected to take place in October. Reportedly, Tesla is investing huge sums to build a fully self-driving car and disrupt the multi-billion-dollar ride-hailing segment.
While slowing sales and higher expenses have dragged TSLA stock lower since 2021, the company is spending heavily on artificial intelligence (AI) infrastructure to gain an early-mover advantage in the self-driving car market.
Morgan Stanley is Bullish on Tesla
Earlier this week, investment bank Morgan Stanley (MS) named Tesla as its top pick in the automobile sector. Analyst Adam Jonas, a long-time fan of the company, has an “Overweight” rating on TSLA stock with a Street-high price target of $310, indicating an upside potential of over 35% from current levels.
According to Jonas, Tesla is seeing higher contribution from regulatory credits and its fast-growing energy storage business is also part of the analyst’s bull case. Jonas explained, “While Tesla is still making cars, we note the company is aggressively redeploying incremental resources, technology, people and capital away from the auto side of the house.”
Out of the 34 analysts covering Tesla, eight recommend “strong buy,” two recommend “moderate buy,” 16 recommend “hold,” and eight recommend “strong sell,” for a tepid ”hold" consensus.
The mean target price for TSLA stock is $196.68, about 14% lower than the stock's current trading price.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
