Table of Contents: Is Tesla a Good Stock to Buy?
Tesla (NASDAQ: TSLA) stock fell to its lowest point in over two years in November after CEO Elon Musk said he had sold another 19.5 million Tesla shares worth about $3.95 billion. Over the past month, Tesla stock has dropped by almost 19%, adding up to a total drop of more than 35% since Musk first revealed his offer to purchase the social network Twitter.
Tesla stock daily chart (TradingView)
Tesla’s automaker competitors are also experiencing difficult times, but the fallout hasn’t been as severe as Tesla’s. For example, Ford and General Motors are down nearly 2% and 11%, respectively.
Why is Tesla Stock Down in 2022, and is Tesla a Good Stock to Buy?
Why is tesla stock dropping 2022, and is Tesla a Good Stock to Buy? Despite his prior claim that he wouldn’t sell any more shares, the majority of analysts believe that Musk went back on his word and sold more Tesla shares in order to fund the $44 billion acquisition of the social network Twitter.
“Twitter overhang on the Tesla story with his focus back on the golden child Tesla which needs his time more than ever given the soft macro, production/delivery issues in China, and EV competition increasing from all corners of the globe,” said Wedbush Securities analyst Dan Ives.
Ives, one of the biggest Tesla bulls on the Street, also removed Tesla from the “Best Idea” list as the Twitter buyout continues to act as a major overhang over Tesla shares. Both investors and analysts perceive the Twitter acquisition as an unwelcome distraction from his duties at Tesla and one of the main reasons behind the fall of Tesla stock.
Musk will now have to juggle between being the CEO of Twitter, managing Tesla, building reusable rockets (SpaceX), as well as sponsoring and establishing a brain-chip company (Neuralink) and a tunneling enterprise (The Boring Company).
This exact question was raised by hedge fund manager Ron Baron, who is now a stakeholder in Tesla, SpaceX, and Twitter, at the 29th annual Baron Investment Conference last month.
“My workload went up from about, I don’t know 78 hours a week to probably 120. Once Twitter is set on the right path, I think it is a much easier thing to manage than SpaceX or Tesla,” Musk said.
Elon Musk has been a long-time admirer of Twitter. He often utilizes Twitter, where he has a sizable following, to freely promote all of his businesses, their goods, and his personal self-image. Tesla is one of the companies which benefited from Twitter by using it to communicate with shareholders.
However, since Musk took over, Twitter’s revenue has decreased “massively.” Because of worries that Musk would soften Twitter’s content control policies, major sponsors including General Motors and Audi have withdrawn their advertisements from the platform.
Civil rights activists have been pressuring advertisers left and right in order to stop Musk’s intentions to fight “cancel culture” by allowing all Twitter users to speak freely on any topic. Musk’s idea to implement paid blue subscriptions for accounts that want to gain prominence and importance also backfired.
Musk remains the CEO and sole director of Twitter for now, but has informed his followers on Twitter that this is temporary. It is currently unknown who will succeed him. All these headlines are creating an overhang on Tesla stock but is Tesla a Good Stock to Buy?
The more problems that Twitter faces, the higher the likelihood that Musk will extend his CEO stay at Twitter, which is likely to be seen as a negative development by Tesla investors. To add to Musk’s worries, the debt that he put on Twitter will need interest payments totaling around $1.2 billion over the course of the following year.
Slowing EV Demand
Furthermore, there are worries that a general global recession, particularly in areas like China, might cause Tesla’s development to stagnate. Tesla reduced the cost of its Model 3 and Model Y vehicles in China by as much as 9% in October, and Chinese tech publication Huxiu claims that a further price reduction may be forthcoming.
Tesla cut prices to stimulate demand for electric vehicles (EVs), which is declining in recent months amid a major economic slowdown. Musk stated that he believed the current recession would last until the spring of 2024 and that “a recession of sorts” was affecting demand for its electric vehicles in China and Europe.
Some analysts, including the prominent sell-side analyst Tony Sacconaghi, stated recently that the EV maker will be forced to cut prices again next year to stimulate EV demand, including in the United States. This is despite Musk saying that Tesla has a supply, not demand, problem.
How Did Tesla Perform Recently?
For the third quarter, Tesla reported a quarterly net income (GAAP) of $3.33 billion, compared to $1.62 billion in profits from the same period in 2021. The profit was made on $21.45 billion revenue, missing the average analyst estimate of $21.96 billion for Q3.
According to Refinitiv, the company reported $1.05 in adjusted EPS topping the expected 99 cents per share. Automobile gross margins were kept constant at 27.9%, precisely as they were in Q2 of 2022. Tesla’s vehicle revenue was $18.69 billion, up 55% over the same period last year. The EV company’s core automotive business’ cost of revenue also increased to $13.48 billion during the quarter compared to $10.52 billion in Q2.
The most accurate representation of Tesla’s stated sales comes from deliveries, and according to estimates gathered by FactSet-owned Street Account, deliveries fell short of the Street consensus of 364,660 units. As of September 30, 343,000 vehicles were delivered, and 365,000 vehicles were produced, according to Tesla.
During an earnings call, Musk tried to remain positive. He addressed investors’ worries that the sluggish global economy and the expensive costs of Tesla cars would turn potential customers off.
“I can’t emphasize enough we have excellent demand for Q4 and we expect to sell every car that we make for as far into the future as we can see,” Musk said in an earnings call. “The factories are running at full speed and we’re delivering every car we make, and keeping operating margins strong.”
“I wouldn’t say we’re recession-proof, but it’s certainly recession resilient,” Musk added.
For the quarter, the energy division of Tesla made $1.12 billion in revenue. This branch installs solar roofs and offers backup batteries for home, business, and utility usage. When it comes to the supply of battery cells, Tesla’s energy department competes with both its own car sector and other EV manufacturers.
“We continue to believe that battery supply chain constraints will be the main limiting factor to EV market growth in the medium and long terms.”
Back in October, Musk said that the 4680 battery’s manufacture was picking up speed, despite executive.
Is Tesla Stock a Buy?
Given the 2022 selloff, many investors are asking the question: is Tesla stock a good buy now as its valuation is less swollen?
Despite the ongoing slump in Tesla stock caused by growing costs for raw materials, problems with manufacturing and sales in China, and Musk’s Twitter distractions, Wall Street has largely continued to be positive. The majority of Tesla analysts tracked by Bloomberg grade the stock as a buy or similar, but for the shares to reach the average analyst target price, a massive rise of 57% is required.
A growing number of Tesla experts believe the share price decline has reached an acceptable level after the company lost about $300 billion in market value in only two months, driving the stock upward. Adam Jonas, a Morgan Stanley analyst, previously stated that Tesla is getting close to its $150 “bear case” price forecast, providing an opportunity for investors to buy Tesla stock at a discounted price.
Jones reaffirmed his $330 price target on Tesla stock while also emphasizing the company’s ability to profit from US consumer tax credits. The Morgan Stanley analyst explains the reaffirmation by Tesla being the only EV manufacturer covered by Morgan Stanley that makes money from the sale of its cars.
Similarly, Tesla stock was upgraded by Citi analysts from sell to neutral, explaining that this year’s more than 50% decline “has balanced out the near-term risk/reward.” Citi analyst Itay Michaeli put a $176 price target, making it one of the lowest on Wall Street.
The analyst said he was shifting his outlook from negative to neutral because of a sharp drop in Tesla stock.
Net-net, Tesla is still able to attract long-term investors who believe that Elon Musk is building the generational leader in the EV sector. Tesla has a huge advantage over its major competitors, mostly on the tech side, and this is likely to continue to translate into much higher-than-usual margins in the auto sector.
However, for investors to become more bullish on Tesla in the near term, they need Musk to focus on the EV maker again as the company continues to ramp up production at its Berlin and Texas gigafactories.