I have long been apprehensive about Tesla (LSE: TSLA) stock. The company and its founder Elon Musk might have acquired impressive cult status, but to me it is all about the numbers. And so far, they were just not convincing enough for me as a relatively risk-averse investor.
Tesla stock’s declining market valuations
The most obvious reflection of this is its valuations. When I last wrote about the Nasdaq-listed electric vehicle (EV) stock in January, it was trading at a price-to-earnings (P/E) ratio of around 320 times. This is huge by any standards, even though it was already a significant come-off from the eye-popping over 1,000 times P/E seen early last year.
It has dropped some more now. After its latest quarterly results released yesterday, based on my calculations, Tesla’s current P/E is at around 115 times, as the company reported a huge 658% increase in net profits in the first quarter of 2022 from last year. This P/E is still quite high, to be sure. But I like the fact that the stock appears to be inching towards being more fairly valued now. As a result, I am doing a rethink on the stock.
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I am further encouraged by the fact that analysts expect Tesla’s earnings numbers to rise over the next couple of years as well. This could make its forward P/E look even more reasonable. Of course this would play out only so far as its price remains unchanged. And it could. In 2022 so far, the Tesla share price has not exactly seen runaway growth.
Robust results
This more rational valuation along with strong results is a good combination. Besides growth in profits, the company has also reported an 81% rise in revenue. This was driven by a near doubling in automotive revenues. The company is also quite optimistic about the future.
I particularly like the fact that it intends to achieve 50% growth in vehicle deliveries annually and reduce costs to generate profits. Also, its performance has been improving over time, which is encouraging. If it continues to make gains, it could continue to stay way ahead of competition.
Evolving EV landscape
With big established auto-manufacturers pivoting toward electric vehicles (EVs), it might not always be easy. But Tesla has the advantage of being the first mover and as an established brand now.
Moreover, I think the adoption of EVs might just get accelerated going by the risks involved in dependence on oil. Not only is the use of fossil fuels environmentally unsustainable, the Russia-Ukraine war, which has exacerbated a run-up in oil prices, underlines the need for energy security.
Short-term concerns
There are stumbling blocks ahead in Tesla’s near future, though. Supply chain issues are expected to hit its production over the course of 2022. Also, increasing raw material prices has seen it increasing product prices. While it has reported a strong increase in sales this time around, I would not rule out an adverse impact on demand in the future because of this.
What I’d do about Tesla
But these are relatively short-term concerns. From a long-term perspective, Tesla stock is finally starting to look attractive to me. I could buy and hold it now for the next 10 years.
