Should you buy Tesla stock? It depends how far into the future you’re willing to look

But as with so many momentum stocks that capture Wall Street’s attention, the million-dollar question for Tesla Inc. TSLA, +1.89% is “what have you done for me lately?”

This quarterly review of TSLA stock aims to get past the overhang of previous performance or flashy tweets from its chief executive to dig into the actual numbers of this rapidly growing business — and more importantly, how those metrics are shaping up versus the competition.

Where Tesla fits in

Tesla is, in many ways, a stock that’s in a class by itself. And even if it weren’t, investors would need to remember that sometimes it’s not easy to compare apples to apples between any single company and its rivals. Consider this a reminder to do your own research and make an informed decision based on your individual needs, other news and numbers beyond what’s in this recap.

With that out of the way, let’s begin with the basics: Tesla isn’t quite the momentum darling it was in years past. And worse, with a 52-week high of about $900 a share and a current price in the low-$600s, it may be possible to make the case that Tesla hasn’t just slowed down but has actually shifted into reverse.

That may not be great for the bulls to hear, but it’s an important starting point.

Key metrics

There are certainly risks to Tesla, particularly given the challenges for automakers lately as they continue to fight through supply-chain disruptions caused by the pandemic and the specter of rising inflation continues to concern both policymakers and investors.

Based on recent statistics, however, it’s highly unlikely Tesla is going to fall apart anytime soon. No stock goes up forever in a straight line, but the long-term uptrend for shares coupled with a few objectively impressive numbers mean we can quibble about short-term trends — but you can’t sink TSLA’s stock.

Assets and cash

Tesla has a market capitalization of about $600 billion, more than the entirety of its top competitors combined. In fact, thanks to its inclusion in the S&P 500 index in December, it’s one of the 10 largest stocks in this leading index.

(FactSet)

Outside of market cap, however, legacy automakers have more tangible assets both when it comes to their massive facilities as well as cash on their books. But as I mentioned in my recent analysis of one of Tesla’s competitors, Chinese EV upstart Nio Inc. NIO, +3.05%, the challenge for investors here isn’t about doing the math on current assets but rather balancing these operations versus future potential — or disruptions that would make old factories obsolete. To wit: If General Motors Co. GM, +2.91% has a bunch of factories making inefficient truck engines that get 20 miles to the gallon, it may not be able to sell that gear for very much.

In a fast-evolving industry like electric vehicles, investors are willing to pay a premium for a stock they think will be dominant down the road — and are increasingly eager to discount the most established names, regardless of their current balance sheets.

Sales growth

In prior years, TSLA stock was buoyed almost entirely by top-line revenue growth and the increase in number of vehicles sold.  In 2020, the company hit its ambitious 500,000 vehicle target set by Musk five years earlier. Tesla believers that bought over those intervening years were richly rewarded.

In 2021, expansion in sales remains impressive even in light of supply-chain challenges, including the recent semiconductor shortage roiling the auto industry. Consider that in fiscal first-quarter numbers released a few weeks ago, Tesla said it delivered about 185,000 total vehicles. That’s more than double the prior year — a great feat in any environment, but particularly in one where legacy automakers such as Toyota Motor Corp. TM, +0.93% and Volkswagen AG VWAGY, +3.73% have struggled for growth and Ford Motor Co.’s F, +7.05% sales have declined.

Pricing power and profitability

Though Tesla saw roughly double the number of cars and SUVs sold, sales as measured by revenue increased only by about 74%. And taken alongside the significant dip in operating margin year-over-year, this paints the picture of Tesla making less money per vehicle as it grows — even as legacy automakers saw their margins expand at the same time.

(FactSet)

To be clear, the naysayers have been wringing their hands about Tesla’s profit potential for years, so many of the bulls are likely to roll their eyes yet again over this criticism. After all, Nio isn’t profitable at all but has still managed to rack up an 877% gain in the stock market over the past 12 months.

However, it’s hard to argue Tesla and Nio are “equals.” After all, the bulls love to tout the former’s recent S&P inclusion and massive market value … so when exactly does that mean it has to play by the rules of profitability and margins that mature automakers have to worry about?

Based on recent share-price movements, it seems Wall Street is increasingly concerned with these old-school issues when it comes to Tesla and not just willing to grant Elon Musk & Co. a free pass based on vehicle sales alone.

Free cash flow

Free cash flow is one area where Tesla has shown it is making strides. Cash-flow generation is prioritized by many investors in a high-tech global economy where the time value of money is not insubstantial. That is doubly true for a growth-oriented company like Tesla that needs significant free cash today if it wants to hit ambitious operational targets.

Based on the last 12 months, then, Tesla has given Wall Street reason to be encouraged as free cash flow didn’t just stay positive but expanded significantly. That’s a huge plus considering the negative numbers from its peers on this list.

(FactSet)

Of course, sophisticated investors are quick to point out that cash flow in a vacuum doesn’t mean much. When you look at TSLA stock’s FCF yield, which is calculated by dividing its trailing cash flow by current share price of around $600, the metric isn’t quite as impressive.

It is positive, which is a good sign. But for those who are looking at TSLA to mature into a significantly profitable firm with strong operational metrics, it’s also a sign there’s a lot of work left to do.

Stock valuation and performance

As I mentioned in my recent analysis of Tesla competitor Nio, investors often see what they want to see in these metrics. If you’re more traditional and prefer metrics like operating margin and cash flow, Tesla’s current listless share price may seem appropriate. And if you’re an aggressive growth investor more worried about future EV dominance than last quarter’s profitability, you may think Wall Street is once again missing the real story.

Whatever your perspective, this much is hard to argue with: Tesla is one of the most dynamic companies of the last five years. Even if you didn’t share in the quadruple-digit percentage in profits it has made some investors over that time, you have to respect that the company has almost single-handedly proven electric vehicles have mass-market potential.

The forward price-to-earnings ratio on TSLA stock is 10 times that of its peers. But once again, we’re back to perspective. If your focus is on the profits alone, then it may seem too high. But if your focus is future growth, then paying a significant premium above current operations may not scare you off if you’re confident Tesla will deliver.

Wall Street’s opinion

That’s the big question mark — whether Tesla will deliver. And based on the most recent numbers, you may be surprised to learn that most people on Wall Street are saying “not likely.”

(FactSet)

The “smart money” out there loves to opine about hot stocks like Tesla, with more than 30 total analysts covering the stock. The sell-side analysts also happen to be relatively bullish by nature, with the typical S&P 500 stock getting 56% of analysts to rate it “buy” based on median ratings.

That makes the fact that TSLA stock garners just a 41% “buy” rating even more troubling. When you have dozens of people who are generally optimistic looking at you, but only four in 10 think the future is brighter for you than the competition? It’s not a good look.

The consensus 12-month price target for Tesla is admittedly16% above where the stock closed May 25, so it’s not as if these analysts are recommending you run away screaming. But any investor worth his salt knows that even a 10% gain can look like chicken feed if everyone else leaves you in the dust.

— With reporting by Philip van Doorn.