Shares of EV giant Tesla, Inc. (TSLA) are currently trading above their 50-day and 200-day moving averages of $190.06 and $195.80, respectively, indicating an uptrend. While TSLA has been aggressively cutting its prices this year to boost demand and gain market share, several rounds of price cuts hit the company’s financials, with first-quarter profit margins dropping below 20%.

While the EV maker is positioned for solid long-term growth, driven by strong demand for its innovative product line and several strategic partnerships and investments, TSLA’s near-term growth prospects are in question. Given TSLA’s weak financials, elevated valuation, and dim near-term growth outlook, it could be wise to wait for a better entry point in this stock.

Shares of EV powerhouse TSLA have been on an upward trajectory so far this year, gaining more than 140% year-to-date. Moreover, the stock has gained 58.2% over the past month and 73.4% over the past six months to close the last trading session at $260.54.

The significant surge in TSLA came amid news of partnerships with renowned automakers Ford (F) and General Motors (GM). On May 26, TSLA and F announced a surprise deal on electric vehicle charging technology and infrastructure. Under the deal, Ford owners will get access to more than 12,000 Tesla Superchargers across the U.S. and Canada starting early next year.

Furthermore, GM followed crosstown rival F in partnering with TSLA to use its North American charging network and technologies. Under this agreement, GM owners will get access to Tesla’s 12,000 fast chargers using an adapter and its EV charging app beginning the following year.

EV manufacturer TSLA has slashed U.S. prices six times since January this year, with the recent reduction in April, to spur demand for its electric vehicles. The company cut prices of its Model Y “long range” and “performance” vehicles by $3,000 each and that of its Model 3 “rear-wheel drive” by $2,000 to $39,990.

Also, the EV maker recently lowered prices for its vehicles in Europe, Israel, Singapore, Japan, Australia, and South Korea, expanding a discount drive it began in Chain in January to boost demand globally. Yet, TSLA reported a 4% sequential increase in deliveries in the first quarter of 2023, much less than the 17.8% sequential rise in the fourth quarter of 2022.

During the first quarter, the company produced more than 440,000 vehicles and delivered over 422,000 vehicles.

Additionally, the aggressive price-cutting strategy by TSLA raised concerns about the company’s industry-leading profit margins. The company’s first-quarter revenue of $23.33 billion was slightly below Wall Street estimates of $23.35 billion. It reported a gross margin of 19.3%, compared to 29.1% margins in the same period in 2022, as the cost of recent price cuts hit its profitability.

Furthermore, TSLA’s net income was $2.51 billion for the first quarter, a decline of 24% year-over-year, and its EPS decreased 23% year-over-year to $0.73. TSLA’s CEO, Elon Musk, also indicated that the company would prefer higher volumes to higher margins.

Jefferies analyst Philippe Houchois downgraded TSLA stock to Hold from Buy and lowered his price target to $185 from $200 on concerns that the EV maker’s drive to shift toward volume growth would take its toll in the near term.

Here’s what could influence TSLA’s performance in the upcoming months:

Deteriorating Financials

For the first quarter of fiscal 2023, TSLA’s total revenues increased 24.4% year-over-year to $23.33 billion. However, the company’s gross profit declined 17.4% year-over-year to $4.51 billion. Also, its income from operations was $2.66 billion, down 26.1% from the prior year’s quarter. TSLA’s adjusted EBITDA decreased 15.1% from the year-ago value to $4.27 billion.

Furthermore, the company’s non-GAAP net income and non-GAAP EPS attributable to common stockholders decreased by 21.6% and 20.6% year-over-year to $2.93 billion and $0.85, respectively. Its free cash flow was $441 million, down 80.2% year-over-year.

Mixed Analyst Estimates

Analysts expect TSLA’s revenue for the fiscal year (ending December 2023) to increase 23.1% year-over-year to $100.27 billion. However, the consensus earnings per share estimate of $3.51 for the current year indicates a decline of 13.7% year-over-year.

In addition, the company’s revenue and EPS for fiscal year 2024 are expected to grow 29.1% and 43.2% year-over-year to $129.45 billion and $5.03, respectively.

Robust Profitability

TSLA’s trailing-12-month EBIT margin of 14.82% is 102.3% higher than the 7.33% industry average. Its trailing-12-month EBITDA margin of 19.37% is 77.8% higher than the 10.90% industry average. Also, the stock’s trailing-12-month net income margin of 13.66% is 219.4% higher than the industry average of 4.28%.

Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 28.70%, 16.39%, and 13.53% are favorably higher than the industry averages of 182.09%, 169.64%, and 273.15%, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, TSLA is currently trading at 74.17x, 418.9% higher than the industry average of 14.29x. The stock’s forward EV/Sales of 8.08x is 576.2% higher than the industry average of 1.19x. Likewise, its forward EV/EBITDA multiple of 45.28 is 370.4% higher than the industry average of 9.62.

In addition, TSLA’s forward Price/Sales of 8.24x is 836.8% higher than the industry average of 0.88x. Its forward Price/Cash Flow multiple of 48.77 is considerably higher than the industry average of 8.69.

POWR Ratings Reflect Uncertainty

TSLA has an overall C rating, equating to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TSLA has an A grade for Quality, in sync with higher-than-industry profitability.

In addition, the stock has a C grade for Growth and Sentiment, consistent with its poor financials and mixed analyst estimates. On the other hand, TSLA has a D grade for Value, consistent with its higher valuation relative to its industry peers.

TSLA is ranked #39 out of 57 stocks in the C-rated Auto & Vehicle Manufacturers industry.

Beyond what I have stated above, we have also given TSLA grades for Stability and Momentum. Get all TSLA’s POWR Ratings here.

Bottom Line

TSLA’s stock has been on an incredible run over the past month. One of the primary reasons for a significant surge in the stock is the recently announced partnerships with the biggest legacy carmakers, Ford and General Motors. However, TSLA’s aggressive price cuts aimed at boosting demand for its vehicles are expected to take a toll on its profit margins.

Given TSLA’s underwhelming financial performance, significantly high valuation, and near-term bleak growth prospects, it could be wise for investors to wait for a better entry point in this stock.

Stocks to Consider Instead of Tesla, Inc. (TSLA)

Given its uncertain short-term prospects, the odds of TSLA outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Auto & Vehicle Manufacturers industry instead:

Honda Motor Co. Ltd. (HMC)

Subaru Corp. (FUJHY)

Suzuki Motor Corp. (SZKMY)

What To Do Next?

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TSLA shares were trading at $265.58 per share on Tuesday morning, up $5.04 (+1.93%). Year-to-date, TSLA has gained 115.60%, versus a 14.81% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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