Should You Invest in Tesla Right Now?

Many investors may feel that they have missed the boat with Tesla (TSLA) -0.13%). While the stock has risen more than 1,800% in the last three years, it has fallen more than 25% since the beginning of January. However, that shouldn’t come as much of a surprise, as stocks are priced to do very well this year.

But investments must be made looking forward, not backward. Tesla, and the electric vehicle industry in general, is entering a new phase and the company is positioning itself to continue to lead the way forward. While returns in the coming years may not match past results, Tesla has plenty of irons in the fire. It’s worth looking closely at whether now is a good time to invest.

Image source: Tesla.

Product Line Expansion

The second quarter was challenging for Tesla. Global supply chain entanglements and rising raw material costs have particularly hit its two new factories that are in the midst of ramping up in Texas and Germany. Production at its Shanghai factory, as well as consumer demand, was hampered by the closures as China continued to implement its zero COVID policy.

But with all those headwinds, Tesla still increased second-quarter sales by 42% year over year and generated $621 million in free cash flow. That’s not bad for what was a difficult quarter. And the company is making progress in growing its product portfolio. CEO Elon Musk said the Tesla Semi truck would start deliveries as early as this year, and the Cybertruck pickup model should still be on track to launch next year as well. Beyond that, a lower-priced EV is expected to be added to its product portfolio as it cuts costs.

Tesla’s energy segment is also ramping up production. Its gigafactories have not only increased battery production to support the growth of Tesla’s vehicle manufacturing. The company has been ramping up production of battery storage and solar systems that it sells separately to customers. The chart below shows comparable growth in the first six months of years since 2019. In its second-quarter report, the company said it continues to increase Megapack storage production as customer interest “remains strong and well above our production rate. .”

Bar chart showing battery storage and solar deployments for the first six months from 2019 to 2022.

Data source: Tesla. Table by author.

road ahead

A crucial negative factor for investors has always been company valuation. If, as analysts on average believe, earnings in the second half of 2022 are assumed to be 50% higher than in the first half, Tesla stock trades at a price-to-earnings (P/E) ratio of around 75 based on this year’s price. Profits.

But the company is working to cut costs. At a recent investor conference, Tesla investor relations chief Martin Viecha said that Tesla’s cost per vehicle was $84,000 in 2017 and has dropped to $36,000 per vehicle more recently. Continuing that trend will allow Tesla to enter the lower priced EV market which should help create massive penetration for the EV sector.

The company recently filed documents saying it is evaluating the potential to build a lithium hydroxide refining facility on the Texas Gulf Coast. That would be another way to optimize your supply chain and control costs. The company said commercial operations could start in the fourth quarter of 2024 if the project moves forward.

That could also help Tesla benefit from the incentives included in the Inflation Reduction Act. The new law has already given Tesla a boost, as it resumes some tax credits that had expired for consumers who buy new electric vehicles. Tesla far exceeded the previous limitation that ended those credits after a manufacturer sold more than 200,000 vehicles. Lower-priced vehicle models and a larger portion of its US-based supply chain will also help you meet eligibility requirements.

The future certainly looks bright for Tesla. While a P/E above 70 is an extremely high valuation, if the company continues to grow at or near 50% for several more years, it won’t look as rich. For investors looking years or decades into the future, buying Tesla right now might make sense.

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

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