Tesla’s (NASDAQ:TSLA) financial performance has been nothing short of stellar over the last two years, driven by surging demand for electric vehicles, the production ramp of the mass-market Model Y and 3, and the opening of new production facilities. For perspective, in 2021, Tesla boosted deliveries by 87% to over 930,000 units, with revenue rising by around 70%. Tesla is also emerging as an icon of profitability in the automotive industry, with automotive gross margins standing at around 30%, which is more than double the industry average.  However, investors are concerned about whether the momentum will hold up. The U.S. economy could be headed into a recession, as the Federal Reserve looks to hike interest rates at a more aggressive pace to tame surging inflation. A 0.75% hike could be around the corner after the central bank hiked rates by 0.5% last month. Consumer confidence is also on the decline, as surging energy, grocery, and housing prices eat into household budgets. Tesla stock is already pricing in some of the economic pain, correcting by about 45% year-to-date, as investors move out of high-multiple growth stocks toward safer plays.
However, we don’t think a recession will meaningfully hurt Tesla. While automotive players typically see sales plummet through economic downturns, we expect Tesla’s business to hold up much better. EV adoption is still in the very early stages and demand has generally been outstripping supply for Tesla. For perspective, the Tesla’s Model Y long range, one of its most popular models, is back-ordered until at least December, despite the company’s growing production base. Tesla has also previously guided for over 50% delivery growth over a multi-year period while indicating that it could approach 60% growth this year. This signals that demand growth should hold up even in the event of a downturn. Moreover, economic indicators do not point to a very deep recession this time around, with household savings rising post the pandemic and banks also remaining well-capitalized.
Tesla has also been getting much better at managing its costs, as it increasingly automates production and vertically integrated its supply chain, with its operating margins standing at almost 3x the automotive industry average as of the most recent quarter. This could put the company in a favorable position versus other automotive players, which have much higher operating leverage. Tesla’s balance sheet is also much stronger as the company has paid down almost all of its debt, excluding vehicle and energy product financing, with its cash position standing at over $18 billion as of March. This should also help to reduce the risk for the company through a downturn.
We think Tesla stock remains a good value at its current market price of about $660 per share, trading at about 54x forward earnings. While this isn’t exactly a low multiple, it is justified by Tesla’s rapid growth and solid execution. We have a $1,100 per share valuation, which is almost 70% ahead of the current market price. See our analysis on Tesla Valuation: Is TSLA Stock Expensive Or Cheap? for more details on Tesla’s valuation and how it compares with peers. For more information on Tesla’s business model and revenue trends, check out our dashboard on Tesla Revenue: How TSLA Makes Money.
|S&P 500 Return||0%||-21%||84%|
|Trefis Multi-Strategy Portfolio||-9%||-27%||188%|
 Month-to-date and year-to-date as of 6/14/2022
 Cumulative total returns since the end of 2016