Tesla (NASDAQ: TSLA) stock has had a very poor 2022. Year to date, it’s down around 70%.
Should I buy the stock for 2023? Or is it a risky bet from here? Let’s discuss.
Lower valuation
When I looked at the investment case for Tesla this time last year, I was put off by the company’s valuation. At the time, the price-to-earnings (P/E) ratio was near 130.
Today however, the valuation is much lower. Currently, Wall Street analysts expect Tesla to generate earnings per share of $5.43 for 2023. So the forward-looking P/E ratio now is near 20.
That valuation is quite reasonable, in my view.
Tesla remains the leader player in the still-young electric vehicle (EV) market. Additionally, it’s a leader in autonomous driving, a market with huge potential.
So, at that multiple, the stock is starting to look very tempting to me.
Can we trust that earnings forecast though?
Serious competition for the first time
For the first time in Tesla’s history, the company is now facing serious competition in the EV space. Rivals include Ford, Porsche, Mercedes, BMW, VW, Rivian, and more. Given the high level of competition, Tesla is likely to lose EV market share in 2023.
Demand issues
Meanwhile, it’s now facing a consumer slowdown for the first time ever. 2023 is likely to be a challenging year for a lot of consumers. So we may see demand for big-ticket purchases such as new cars falling. We may also see demand for vehicle extras such as Tesla’s full self-driving (FSD) software dropping off.
It’s worth noting here that financing a new car today is far more expensive than it was 12 months ago due to the fact that interest rates have jumped. This could also have an impact on demand. Tesla has never had to face these issues before, so it’s hard to know what will happen.
One region that’s already showing signs of a demand slowdown is China, the brand’s second-largest market. Recently Tesla has been forced to cut its prices in the country. It also temporarily suspended production at its Shanghai plant this month.
“You’re starting to see some demand cracks,” said Wedbush analyst Dan Ives. “[But] I don’t believe the longer-term story in China is thrown out the window, I just think they’re navigating some growth challenges.“
Given these competition and demand issues, we may see further price cuts from Tesla in the near future (it recently cut prices in the US and Canada). This could lead to lower profit margins and earnings.
Twitter distraction
Of course, there’s also Elon Musk’s purchase of Twitter to consider. This could be a serious distraction for the Tesla CEO in 2023.
This issue could also continue to impact sentiment towards the stock. It seems that a lot of Tesla investors are quite upset that Musk is dedicating considerable time to Twitter now, and they’re jumping off the Tesla bandwagon.
My move now
Putting this all together, and considering that Tesla stock is locked in a pretty nasty downtrend at present, I’m happy to leave it on my watchlist for now.
I do think it’s starting to look very interesting. However, right now, there are a few other stocks that I see as more compelling investments from a risk/reward perspective.
