Tesla stock has tanked. Should I buy?

Tesla stock has fallen nearly 30% over the last six weeks. Should Edward Sheldon buy now, or is there further share price weakness ahead?

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For a while now, I’ve been thinking about buying some Tesla stock (NASDAQ: TSLA). I reckon the company has a lot of growth potential.

Recently, Tesla’s share price has dipped significantly. Currently, it’s hovering around the $200 mark, nearly 30% below the level it was at in mid-September ($275).

Is now a good time to buy the growth stock for my portfolio? Let’s discuss.

The largest AI project in the world?

What excites me about Tesla is its ‘Dojo’ artificial intelligence (AI) technology. Dojo is a supercomputer designed to help the company improve its Full Self-Driving (FSD) capabilities.

With Dojo, the automaker can process millions of terabytes of video data captured from real-life driving scenarios (from the 4m+ Teslas on the roads) in order to enhance its FSD machine-learning models.

Analysts at Morgan Stanley – who have a $400 share price target on Tesla – reckon Dojo could potentially add $500bn to the company’s market-cap.

Their view is that the technology gives Tesla an ‘asymmetric advantage’ over its rivals and could lead to faster adoption of ‘robotaxis’ and network services, and also open up new markets.

Someone else who is very bullish on this side of the business is growth investor Cathie Wood.

In a recent interview with CNBC, she said that she sees “incredible” revenue and margin expansion ahead for Tesla, adding that she believes its profit margins could rise to around 60-70% in the future, from 20% today, as a result of robotaxi and autonomous offerings.

Tesla, we think [is] the largest AI project in the world,” said Wood.

All in all, there’s a lot to be excited about here in the long term.

Near-term share price risk

What concerns me however, is the near-term electric vehicle (EV) side of the business. Today, it’s much harder to finance a new car than it was 18 months ago, due to the fact interest rates are so much higher (CEO Elon Musk mentioned this on the recent Q3 earnings call).

And with many consumers currently reining in their spending to conserve capital, I think there’s a risk Tesla’s growth could stall.

It’s worth noting that top-line growth for Q3 (9%) was the slowest in more than three years.

Another issue is that there’s now so much competition in the EV space. To remain a leader here, Tesla is having to lower its prices. This is hitting profit margins.

The problem here is that even after the recent share price fall, Tesla still has a sky-high valuation.

With Wall Street expecting earnings per share of $3.16 for 2023, the forward-looking price-to-earnings (P/E) ratio is about 64. That kind of multiple doesn’t leave much room for error (a possible slowdown in growth or a big hit to margins).

My plan of action

Weighing everything up, I’m going to hold off on buying Tesla stock for now.

I do like the long-term growth story here. However, right now, the risk/reward proposition doesn’t look great, to my mind, as I think we may see further share price weakness in the near term.

All things considered, I think there are safer growth stocks to buy.

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.

Edward Sheldon 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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