I consider Tesla a top undervalued growth stock right now

Many investors are selling their Tesla shares, but our writer thinks this technology growth stock has a new period of prosperity ahead of it.

| More on:

Image source: Tesla

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tesla (NASDAQ:TSLA) shares are one of the more compelling growth stocks I currently own in my portfolio. As the price is down roughly 60% from all-time highs, I think this is a really compelling opportunity for me to buy more of the shares.

Pivoting from EVs to AI and robotics

In my previous research on Tesla, I was convinced the company had a strong future. And I cited its full self-driving capabilities as one of the core reasons for this. Autonomous taxis by Tesla could be a big market, I feel.

However, that’s not all there is to the operational future. The company continues to develop a robot called Optimus, and it has a machine-learning training programme called Dojo, which should be instrumental in powering its future advanced tech offerings.

There’s some competition with OpenAI at the moment, which is pioneering the famous ChatGPT. However, I think Tesla can adopt a very different approach to AI, with a deeper emphasis on robotics.

The financials spell opportunity for me

It’s definitely reasonable to state that Tesla was overvalued in 2022. However, now I think the stock’s become undervalued.

Part of the reason investor confidence in the shares has waned recently is that its gross margins have declined, down roughly 4%. This was due to tough macroeconomic conditions and rising competition in the EV market, particularly in China. Tesla cut prices multiple times as a result.

But revenues have also delivered much slower growth recently, and there’s been a contraction in earnings and free cash flow. For example, revenue only grew 9.6% over the last year. Compare that to the 10-year average of 38%, and we can see why investors are a little deflated at this time.

However, the stock price has really adjusted as a result of the current slowdown. With a price-to-earnings (P/E) ratio at the moment of roughly 45, compared to a median ratio of around 107 over the last 10 years, the opportunity starts to become quite a bit clearer. Now, Tesla’s trading at a lower P/E ratio than Amazon and close to other big tech companies like Microsoft. That’s reasonable, in my opinion, because I think moving forward, Tesla’s going to be viewed as an advanced technology company, not just a car maker.

What if the operational changes don’t work?

I’m clearly optimistic about Tesla, but that still doesn’t mean I’m gambling. I hold it in my portfolio at roughly 7.5% of my entire assets.

Unfortunately, there’s always a chance the company’s future plans are unsuccessful. Companies like Alphabet‘s Waymo actually have the lead right now in autonomous taxis.

There are a lot of regulatory hurdles when it comes to AI, and there’s a significant chance that this becomes more acute as the technology scales. Especially when it comes to autonomous robots, which Tesla’s developing, safety will be paramount. Legal restrictions could definitely slow, or even totally inhibit, growth in some areas because of security concerns.

I’m staying invested and watching carefully

Even given the risks, I think the potential for high growth is too good for me to ignore. I believe in the management. While it’s going through a tough time right now, I think it will pull through to brighter days for shareholders.

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.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Oliver Rodzianko has positions in Alphabet, Amazon, Microsoft, and Tesla. The Motley Fool UK has recommended Alphabet, Amazon, Microsoft, and 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.

More on Investing Articles

Black father holding daughter in a field of cows
Investing Articles

A FTSE 100 share that could create generational wealth

Investing in FTSE shares can help individuals pass down a significant chunk of cash to their children and grandchildren, data…

Read more »

Investing Articles

Here’s what the BT share price could mean for passive income investors

The BT share price has been falling for years, but that might be about to change. And dividends could be…

Read more »

Investing Articles

At £4.76, is the Aviva share price a steal? Here’s what the charts say!

Aviva has outperformed the Footsie over the last year. But is there still value in its share price? This Fool…

Read more »

Photo of a man going through financial problems
Investing Articles

Does a 43% price drop make this undervalued UK stalwart one of the best cheap shares to buy now?

After losing a third of its value of the past five years, this might be one of the most undervalued…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

My top 3 picks today for a £20,000 Stocks and Shares ISA

Here are three very different investments to consider for a Stocks and Shares ISA, covering both the UK and US…

Read more »

Businesswoman calculating finances in an office
Investing Articles

The Darktrace share price has been surging — and it could climb higher

I think the Darktrace share price could have more room to run. Despite the competitive AI industry, the firm looks…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

With its 7% dividend, should I be watching the Aviva share price?

Dividend investors will struggle to find many companies with a yield above 7%, so should the Aviva share price be…

Read more »

Investing Articles

Could this be one of the FTSE 100’s best cheap dividend shares?

Looking for the best dividend growth shares to buy? Our writer Royston Wild thinks this FTSE 100 housebuilder might well…

Read more »