Tesla shares are down 45%: should I buy now?

Tesla shares have been hammered by rising inflation and interest rates, falling 45% year to date. This Fool assesses whether now is the time to buy.

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2022 has proved a brutal year so far for Tesla (NASDAQ: TSLA) shares and they’re down 45% year to date. However, over a 12-month period the shares have returned 5%, and over the past five years a whopping 747%.

So, should I be capitalising on the recent price fall and adding Tesla shares to my portfolio? Or should I steer clear of the world’s largest electric vehicle company? Let’s investigate.  

Why the stock has fallen

One of the primary reasons why Tesla stock has taken a hit over the past few months is rising inflation. US inflation reached 8.6% in May, vastly outpacing analysts’ expectations. Inflation erodes the future value of company earnings and tends to put pressure on stock valuations. This is especially true when interest rates also rise, as they have done in the last month in both the US and UK. Tesla CEO Elon Musk took to Twitter to announce he had a “super bad feeling” about the US economy, and that Tesla would have to cut its workforce by around 10% to cope. This isn’t good for the firm’s growth and has been reflected in the recent decline in the share price.

In addition to this, the firm has suffered from prolonged Covid-19-related matters. Back in 2020 and 2021, the pandemic led to huge supply bottlenecks that curtailed Tesla’s production. More recently, the lockdown in Shanghai meant that Tesla had to stop its production there, slowing production growth. Even before these shortages, demand was far outweighing the supply of vehicles, so these additional disruptions are really limiting the firm’s growth.

Unappealing valuation

Tesla shares are currently priced at $650. This is some way off of its $1,200 high reached in November 2021. However, the shares still trade on of a monstrous price to earnings (P/E) ratio of 87. For context, good value stocks usually trade under the 10 P/E mark. I don’t think the above macroeconomic and supply risks are priced into Tesla shares, which does worry me.

Reasons to be cheerful

Tesla’s most recent set of results was outstanding. In the first quarter of 2022, the company’s revenues swelled 87% year-on-year, with profits jumping over 130%. Both of these figures vastly outpaced analysts’ expectations, and the shares surged over 5% on the encouraging news. If the company can deliver more results like this, I think investors will react positively and push the stock up further.

The verdict

Although Tesla shares have fallen substantially, the lofty valuation still bothers me. I don’t think the risks facing the firm are fully reflected in the current share price. The next set of results is due for release in late July and could help bump up Tesla stock. However, it’s too uncertain a situation for me to warrant an investment. For that reason, I won’t be buying any shares today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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