Last year was a great year for Elon Musk and Tesla (NASDAQ:TSLA) stock. Shares in the EV giant rose 124%, having dipped in late 2022.
So, has the rally gone too far? And what’s 2024 got in store?
Tesla is getting expensive
At the time of writing, Tesla stock is trading for $248, while the average target price is $237. That’s never a good sign, and it’s a bad starting point for our exploration.
What’s more, there’s been several high-profile downgrades in recent months. The most of these being HSBC in October.
Analyst Michael Tyndall Tesla with a ‘sell’ rating and a price target of $146, implying a 43% drop.
Tyndall said that Tesla’s more promising projects will not generate positive cash flow until the end of the decade.
The analyst called Elon Musk as a “single-person risk” for the firm.
And we can back this downgrade up with some data of our own. The firm trades at 80.1 times TTM (trailing 12-month) earnings, and 94.4 times forward earnings, making it exceptionally expensive.
Moreover, the price-to-earnings-to-growth (PEG) ratio doesn’t improve the situation. Tesla is expected to record compound annual earnings growth of 16.6% over the next three-five years. And, in turn, this leads to a PEG ratio of 4.65.
For clarity, I’d be looking for a PEG ratio below one to suggest undervalued conditions.
Will margins shrink further?
I really want to believe in this Elon Musk project. Tesla has engendered a lot of change in the industry and is at the forefront of AI/self-driving cars. And I think this is something to be commended.
However, I’m not willing to put my money where my mouth is. As Tyndall noted, it’s going to be a while before Musk’s idea of a self-driving taxi fleet comes to life, or contributes positively to earnings.
And in the near term, investors could be looking at more margin compression. With an economic slowdown looming — or in some cases already here — Tesla may find itself needing to spend more to encourage sales amid weak demand.
A better option?
Well, there are plenty of companies to choose from if we’re looking for an alternative to Tesla.
My personal favourite is Li Auto with its 0.05 PEG ratio. Yes, it’s Chinese and this could present some challenges when it comes entering the global market.
The company reported delivery of 50,353 vehicles in December, reflecting a impressive growth of 22.7% month on month and a year-on-year increase of 137.1%.
Moreover, the firm is really expanding its range, and will deliver the first of its all-electric minivans in March.
Of course, it’s worth remembering that China is a huge market for EVs, even if Li has some issues expanding overseas.
