Is Tesla stock a buy?

adze (TSLA -8.45%) it has become such a valued business that it is included in the exclusive “Magnificent Seven” group, which consists of some of the most dominant and innovative companies the world has ever seen. But while the stock has soared 1,070% over the past decade, it has underwhelmed investors over the past three years.

However, this top electric vehicle (EV) stock. is probably still on the radar of many investors out there. Is Tesla a smart buy? To arrive at a final answer, let’s consider both the bull and bear case for the business.

The case of the Tesla bull

Tesla deserves credit for disrupting the auto industry. Based on the belief that the world needs to reduce carbon emissions, the company has introduced popular electric vehicles to customers around the world. And this has spurred heavy investment in research and development among old car companies.

Tesla has a significant 50% share of the US electric vehicle market. And now it sells a suite of five passenger vehicles, with a cheaper model on the way next year.

One way to tell if a company is high quality is to figure out if there is an economic moat or sustainable competitive advantages that support better financial performance. It’s easy to argue that Tesla fits in here.

First, its brand has tremendous value. As has been the case historically, Tesla has been able to charge premium prices for its electric vehicles (more on that below), leading to consistent positive earnings going into 2020.

Cost advantages in Tesla’s manufacturing process also supported this core performance. The business is able to make and sell cars profitably, which many of its rivals cannot say.

Auto revenue accounted for 78% of Tesla’s sales base in Q2. However, the bulls hope that Tesla’s business will look different in the long run. The company has been working on developing the capabilities of its AI Dojo supercomputer to finally introduce full self-driving technology, which could lead to Tesla launches a robotaxi service which could seriously enhance its financial prospects.

Tesla Bear Case

One of the most obvious factors Tesla naysayers will point to is the company’s slowing growth. While investors have grown accustomed to businesses posting monstrous double-digit annual earnings in years past, things have gotten worse.

In the last two quarters of 2023, Tesla reported single-digit revenue growth. In the first quarter of this year, that figure turned negative before rising to just over 2% in the second quarter.

Industry executives blame weaker-than-expected demand for electric vehicles. Higher interest rates make financing a new car more expensive, so it makes sense why consumers are pulling back. In addition to price, car anxiety and the belief that there are not enough charging stations are still top deterrents to purchasing an electric vehicle.

Tesla’s rise resembled a hyper-growth software enterprise. But now, the business looks like a typical automaker. It cannot escape the extreme competition from domestic and international rivals. Tesla has implemented numerous price cuts to support demand for its cars in this economic environment.

Declining sales and pricing pressure also weighed heavily on the profit and loss account. Tesla Q2 2024 gross margin and operating margin were significantly lower than in the same period in 2022.

Even though the stock is trading 44% off its peak price, it’s still expensive at a price-to-earnings ratio of 62. This makes Tesla the most expensive of the Magnificent Seven stocks, despite the company having, probably the worst performers from a fundamental perspective. .

Tesla has done a great job accumulating shareholder capital over the past decade. But I find the bull’s arguments more convincing. And that’s why I don’t think it’s a good time to buy the stock.