Stock Market

Tesla (NASDAQ:TSLA) stock provided investors with big losses in 2022, but this year has been completely different.

On a year-to-date basis, TSLA stock has surged more than 130% higher, obliterating the Nasdaq index and most of its growth peers, for that matter. 

Of course, as a leading EV manufacturer, Tesla provides many catalysts for growth insteps to get excited about.

That said, given the company’s heightened valuation, slower-than-expected sales, and the prospect of continued lawsuits and analysts downgrades, I think now may be the time for investors to resist temptation, and wait for a dip before investing.

Tesla Had Slow July Sales

Tesla’s China-made vehicle sales dropped by 31% in July compared to June, marking the first month-to-month decline since December.

This decline coincides with a legal class action by California Tesla owners, who accuse the company of false advertising and breaching warranties.

In contrast, Chinese competitors like BYD (OTCMKTS:BYDDF), Nio (NYSE:NIO), XPeng (NYSE:XPEV), and Li Auto (NASDAQ:LI) reported significantly increased July deliveries.

In July, Tesla sold 64,285 electric vehicles (EVs) produced in China, marking a significant 128% increase compared to the same period last year when production was limited because of factory upgrades. 

Chinese competitors like BYD experienced rapid growth, with a 61% YoY rise in July sales, totaling 261,105 vehicles, including EVs, hybrids, and exports. Notably, BYD outsold Tesla in Chinese EV sales by 29% in the first half of this year.

Tesla Has a New Class-Action Lawsuit

TSLA stock is making headlines due to a fresh class-action lawsuit related to range accuracy.

The lawsuit accuses Tesla of exaggerating its EVs’ range in marketing and using a diversion team to avoid addressing customer complaints about range.

The legal action, represented by Milberg Coleman Bryson Phillips Grossman, involves three plaintiffs alleging Tesla didn’t address their legitimate range concerns.

Although a class-action lawsuit poses some concern for Tesla stock, its impact remains minimal for now. Shares have experienced only a slight dip on Thursday.

However, the lawsuit’s outcome might become a negative trigger, influencing stock performance. Investors in TSLA stock need to monitor the legal proceedings for potential long-term implications.

Tesla Stock Downgrades

While I generally support long-term investment in Tesla, current valuation worries advise against immediate stock entry.

UBS analyst Patrick Hummel, like me, recognizes Tesla’s merits but recently shifted his rating from “buy” to “hold.” It appears his primary concern is the stock’s overvaluation.

Tesla leads globally in electric and autonomous mobility, though the upcoming year suggests a balanced risk/reward scenario, as noted by Hummel.

Like him, I appreciate Tesla’s strides in affordable EVs, but I also find the risk-to-reward balance for Tesla stock more “balanced” than enticingly “attractive.” 

This sentiment is highlighted by Tesla’s high non-GAAP trailing 12-month price-to-earnings (P/E) ratio of 65.01x, notably surpassing the sector’s median of 13.17x.

TSLA Valuation is Not Attractive

Tesla has thrived by expanding manufacturing and capitalizing on low commodity costs and vehicle pricing power for improved margins.

However, this advantageous situation is shifting. Tesla lowered prices by 10% in China, a major market. With intense competition investing heavily in the EV sector, ongoing pricing pressure could hamper Tesla’s future profit margins if selling prices are forced down.

Numerous concerns cast shadows over Tesla’s outlook, but the primary deterrent for investors is its high valuation, particularly compared to industry peers.

The stock’s trailing P/E ratio of nearly 50 contrasts starkly with the norm of around 10 for automotive companies, considering intense competition, substantial capital requirements, and commodity price volatility.

Purchasing Tesla shares at present incorporates a presumed fivefold earnings growth, even considering possible margin decline because of earlier reasons.

While Tesla might exceed these projections, less risky opportunities likely exist for investors, especially amid the current bear market. In 2023, opting for safer investments and avoiding Tesla shares appears prudent.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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