Is Tesla Stock a Buy?

In the last decade, you’d struggle to find a stock that performed better than Tesla (TSLA 0.53%) and its 2,860% return. This means that a $10,000 investment in November 2013 would be worth a staggering $296,000 today.

But to be clear, it’s been a volatile ride for shareholders in this electric-vehicle (EV) stock. As of this writing, shares are down 41% below their peak price.

Does this mean that buying Tesla on the dip is a smart decision for your portfolio?

Latest financials

For a company that’s historically experienced rapid growth, thanks to the adoption of its EV fleet, Tesla has run into some financial woes this year. In the most recent quarter (Q3 2023 ended Sept. 30), revenue was up 9% year over year, a dramatic slowdown from the impressive double-digit growth registered in prior quarters. Diluted earnings per share declined 44%. These headline figures both came in below Wall Street expectations, so it’s no surprise that shares tanked 9% immediately following the news.

The story this year hasn’t changed. Tesla continues to deal with shrinking margins. The gross margin of 17.9% in Q3 was down substantially from 25.1% a year ago.

Elon Musk hasn’t hesitated to point to the macro environment and how higher interest rates have made car purchases much less affordable. This has resulted in Tesla lowering prices numerous times throughout 2023. Investors need to accept the fact that prolonged economic headwinds will likely pressure the outlook for the business.

On a bright note, the highly anticipated Cybertruck is still on its previously announced production schedule. The first deliveries are set to happen later this year.

Economic moat

It’s time to focus on a very important trait for long-term investors: Tesla benefits from having an economic moat protecting its competitive position. A term popularized by legendary investor Warren Buffett, an economic moat is a single competitive advantage (or a combination of several) that helps a business keep rivals and new entrants at bay.

In Tesla’s case, the most obvious advantage it has is its incredible brand strength. Despite margin pressure, the business is still able to post industry-leading profitability.

Tesla also benefits from cost advantages. By constantly trying to develop more efficient manufacturing capabilities, the company is able to lower the unit production costs of its vehicles.

Tesla is developing a technological edge that could help strengthen its competitive position even more, particularly as it relates to artificial intelligence (AI). The company is investing heavily in its Dojo supercomputer’s capabilities to analyze more driving data that can help improve full self-driving functionality. Tesla is hoping to be a leader in AI and autonomous vehicles that could help Musk realize his grand ambitions of one day launching a robotaxi service.

Investor perspective

Despite Tesla’s recent struggles, it’s hard not to come away impressed at what the company has achieved by disrupting the auto industry and quickly ascending as a leader in EVs. Plus, it’s never been a good idea to bet against Elon Musk.

But I’m not comfortable buying the stock right now. Tesla does possess a strong brand, but even that doesn’t protect it from having to engage in margin-crushing price wars.

The auto industry is extremely competitive. Tesla can’t escape that reality, especially as domestic and international EV companies enter the market and slowly chip away at the leader. This worries me.

The current valuation also gives me pause. Tesla shares are trading at a price-to-earnings (P/E) multiple of 78 (as of Nov. 21). Any way you look at it, that’s an expensive price to pay. I believe that Tesla has always received a premium valuation simply because of the notoriety of its founder and CEO.

Yes, this is a disruptive business that might still have sizable upside should the long-term goals come to fruition. But there’s still a lot of uncertainty surrounding this ultimate outcome. At the current P/E ratio and market cap, I don’t think this is a smart buy.