After delivering game-changing returns to shareholders since its initial public offering (IPO), the electric vehicle (EV) market leader Tesla (TSLA) has trailed the broader markets by a wide margin in the last three years. Tesla stock touched all-time highs in November 2021, and has since underperformed significantly.
While major equity indices are hovering close to record levels, Tesla stock is down 44% from all-time highs, valuing the company at $740.1 billion by market cap. Let’s see if investing in the EV manufacturer is a good choice right now.
Tesla Tanks After Disappointing Q2 Results
Shares of Tesla fell 12% on July 24 following its Q2 results, after the company reported revenue of $25.5 billion and adjusted earnings per share of $0.52. Comparatively, analysts forecast sales at $24.77 billion and earnings at $0.62 per share for the June quarter.
While sales rose by 2% year over year, automotive revenue was down 7%. Tesla’s automotive sales include revenue from regulatory credits, which more than tripled to $890 million.
In the last two years, Tesla has been wrestling with slowing sales and rising competition, primarily from Chinese manufacturers. Moreover, it is impacted by macro headwinds such as inflation and high interest rates, both of which are weighing on vehicle demand and consumer spending. To offset sluggish demand, Tesla was forced to reduce vehicle prices and offer discounts or incentives, negatively impacting its bottom line.
Tesla’s operating margin shrank to its lowest level in three years falling to 14.4% from 18.7% in the last 12 months. It was the fourth consecutive quarter where Tesla’s operating margin has narrowed, despite lowering the headcount by 10% in the past year.
Can Tesla Stage a Turnaround?
Tesla is currently the largest EV maker in the U.S., but continues to lose market share to new and legacy players like Ford (F), General Motors (GM), and Lucid Motors (LCID). Investors are keeping their hopes up for future developments that could help Tesla regain a strong position in the growing EV market.
One potential game-changer for Tesla could be the upcoming Robotaxi event scheduled for October. Tesla is reportedly investing significant resources to develop a fully self-driving car and disrupt the multi-billion-dollar ride-hailing segment.
Despite facing challenges such as slowing sales and increasing expenses, Tesla is heavily investing in artificial intelligence (AI) infrastructure to establish an early advantage in the self-driving car market.
Morgan Stanley’s Positive Outlook on Tesla
Earlier this week, investment bank Morgan Stanley (MS) named Tesla as its top pick in the automobile sector. Analyst Adam Jonas, a long-time supporter of the company, has an “Overweight” rating on TSLA stock with a Street-high price target of $310, indicating an upside potential of over 35% from current levels.
According to Jonas, Tesla is experiencing higher contributions from regulatory credits, and its fast-growing energy storage business is also part of the analyst’s bullish case. Jonas emphasized, “While Tesla is still making cars, we note the company is aggressively redeploying incremental resources, technology, people, and capital away from the auto side of the house.”
Out of the 34 analysts covering Tesla, eight recommend “strong buy,” two recommend “moderate buy,” 16 recommend “hold,” and eight recommend “strong sell” for a tepid “hold” consensus.
The mean target price for TSLA stock is $196.68, about 14% lower than the stock’s current trading price.