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Is It Time To Buy Tesla Stock Despite Its Free Falling Share Price? $TSLA

Calvin Lo

Tesla (TSLA) stock has been in free fall the past week, closing down 72% YTD to around $113 per share last I checked. Why is TSLA stock dropping like a rock and is this a buying opportunity?

Read: Tesla shares’ 2022 collapse hits 69% after latest sell-off on demand worries in China

Source: Google

Why Tesla stock is falling

  • Demand concerns. Last week, Tesla started offering $7.5K discount to US customer to take delivery of Model 3 and Y before year end. Starting 1 Jan 2023, these models will likely qualify for $7.5K EV tax credit under the Inflation Reduction Act (IRA) so some customers might be delaying delivery to qualify for the credits. However, this does raise questions of demand since customers are willing to wait. Adding fuel to fire, rumours of Giga Shanghai production shutdown stoked demands fears.
  • Recession risks. On macro side, fears of recession are increasing. In a recession, demand for big ticket items especially Tesla cars which are considered somewhat premium, might be affected as consumers scrutinise spending closer. Consumer wallets have already been affected by higher inflation reducing discretionary spend. There are many other cheaper EV alternatives in the market now.
  • Twitter saga. Tesla CEO Elon Musk has had to sell a lot of TSLA stock to fund his purchase of Twitter. Although he has mentioned that he’s not selling for the next 18-24 months, he has gone back on his word before so I won’t discount anymore selling from him in coming months.
  • China reopening. China finally giving up on its zero-covid policy and easing movement restrictions will be good for their economy in the long term (can’t lockdown forever), but there will be a reckoning in the short term. Factory workers will inevitably fall ill, affecting production at Giga Shanghai.

Long term tailwinds intact

  • Product roadmap. Tesla finally delivered its first production Semi truck to PepsiCo this month after lengthy delays. Cybertruck is next, with production expected to start in mid-2023 but don’t hold your breath. Tesla has yet to unveil its next product, which many anticipate to be a lower-cost mass-market car dubbed Model 2.
  • EV adoption. EV sales have been rising steadily, boosted by high oil prices. Although oil prices have eased recently, the long term trend is clear especially with sustainability and climate change being top of mind for many consumers. Tesla’s market share of EVs has been falling (although still the largest) but should still remain a top player for years to come.
  • Full Self Driving. This will be the game changer that justifies a valuation of Tesla more like a tech company rather than just the auto company it is now. Tesla also has competitive advantages in manufacturing (robotics, single part casting, motor, batteries) but those aren’t as obvious and more difficult to quantify. If Tesla solves FSD (which is a general solution vs other autonomous vehicle tech from other players like GM Cruise, Mobileye, Baidu, etc) and can start to rollout its robotaxi fleet at scale, Tesla valuation might go bonkers again. High risk, high reward.

Valuation

If you buy TSLA stock today, you’re buying at roughly 20x fwd PE (2023 annual earnings) and only 3.1x fwd PS (2023 annual revenue). That’s considerably cheap vs its historical average although still much higher than other automakers.

Source: Seeking Alpha

My thoughts

Read my investment thesis for Tesla here.

The main question you need to ask yourself is whether you think Tesla is and will continue to be just an auto company, which might mean that the stock is overvalued.

However, if you think that Tesla is more of a tech company and will achieve at least some of the ambitious project it is going after, Tesla’s expensive valuation might still make sense for long term investors willing to stomach some crazy volatility ahead.

Personally, I’ve been buying on the way down which has been painful but I can’t resist the attractive price. I’m trying hard to hold off in view of the tough macro environment ahead but I might end up nibbling slowly along the way.

Screenshot of TSLA holdings in Personal Portfolio

Are you buying Tesla stock now after the sharp decline or staying far away?

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Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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