This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Tesla (NASDAQ: TSLA) stock has served investors well in 2023. The electric-car maker's shares have soared more than 90% year to date. Indeed, the growth stock's performance has been so staggering that investors are now regularly referencing the stock's membership in the elite club called the "Magnificent Seven." The group features seven large technology companies that collectively trounced the S&P 500's returns this year.
With such strong performance from Tesla in 2023, the growth stock once again became a Wall Street darling. Are more big returns ahead for the stock in 2024 and beyond? Or has the stock become overvalued? Let's explore whether the stock looks more like a buy, hold, or sell today.
Big growth drivers
There's no denying the array of strong growth drivers Tesla has supporting its business.
First, there's the secular momentum it's seeing from increasing demand for electric cars. This has played a big role in the company's 42% year-over-year growth in trailing-12-month deliveries.
Of course, Tesla is also seeing incredible momentum in its energy storage business as utilities are turning to the company's utility-scale battery pack systems to stabilize the grid, prevent outages, and reduce costs. Its energy storage deployments, measured in gigawatt hours, soared 90% year over year in Q3.
Additionally, the automaker delivered the first units of its new all-electric Cybertruck in late November. While deliveries of the vehicle likely won't ramp up to any meaningful volume until sometime around the end of 2024, the vehicle importantly gives Tesla access to the massive and lucrative pickup truck market.
Finally, investors shouldn't underestimate the potential of Tesla's full self-driving software. While the software is still in beta, it already has formidable pricing power with consumers. Even in beta, the software upgrade costs Tesla owners a whopping $12,000. Despite the high price tag, tons of customers are opting in. Impressively, Tesla's vehicle fleet has already cumulatively driven more than 0.5 billion miles using full self-driving software, giving Tesla a massive set of data and analytics to rapidly improve the artificial intelligence (AI) supporting the software.
It would be difficult to overstate the importance of Tesla's self-driving efforts to management. "We will continue to invest significantly in AI development as this is really the massive game changer," said Tesla CEO Elon Musk during the company's third-quarter earnings call when discussing its full self-driving technology development. "... success in this regard, in the long term, I think, has the potential to make Tesla the most valuable company in the world by far," Musk said.
Undeniable headwinds
With all of this said, three undeniable headwinds for the stock make it a hold at its current price rather than a buy.
- Tesla stock's high valuation of more than 75 times earnings arguably already prices in significant success, leaving very little room for error.
- High interest rates have made vehicle affordability more difficult and Tesla has had to respond by lowering prices (there's no telling how long interest rates could remain elevated).
- There's always a risk that investors are underestimating how costly it will be for Tesla to execute on its growth plans.
For these three reasons, Tesla stock should be viewed more like a hold at its current valuation than a buy despite its business momentum and its long runway for further growth. However, if shares took a 25% to 30% haircut, it might be time to accumulate shares of this disruptive innovator.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
