Tesla’s Recovery Gains Momentum

Key Points

• Shares have rallied hard to start the year.
• Improved margins are impressing investors. 
• The long-term opportunity remains strong.

Tesla Inc’s NASDAQ: TSLA shares have recently jumped as much as 75% as the electric vehicle giant begins to look like its old self. Having watched the stock shed that much from 2021’s all-time high into the start of the year, this turnaround will be a welcome reprieve for Tesla bulls. 

But is this just a dead cat bounce, or something more? The economy is still jittery, inflation is still hot, and interest rates are still rising; all key factors behind the risk-off environment that has driven the stock down.

Many investors are divided on the company's prospects. On the one hand, you have the bulls who see a bright future ahead for Tesla, pointing to its innovative technology, expanding product line, and increasing market share.

On the other hand, you have the more cautious bears, citing the company's high valuation, production and delivery challenges, and growing competition in the electric vehicle market.

But after such a sell-off, we’re inclined to think that the bears have had their day and the bulls are ready to take back control. Let’s look at why the stock should continue to rally. 

Bullish Comments

Just yesterday, the team over at Berenberg upgraded Tesla to a Buy rating from Hold because the stock was still attractive despite the rally this year. Analyst Adrian Yanoshik and the team there believe that the price cuts of recent weeks, which did so much initial damage, reflect the company's cost leadership strategy to take more market share.

They see the price cuts as only a blip as margins continue to recover with products shifting away from the California plants, known for their higher labor costs, old equipment and inefficient design. Looking at the multi-year opportunity, Yanoshik sees greater efficiency in capital and labor underpinning the stock’s comeback. 

The bullish comments from the Berenberg team echoed those from Morgan Stanley, who last week reiterated their position on Tesla as its Top Pick in the auto sector. Their price target of $220 points to an upside of more than 30% still to be had from where shares closed on Monday and would mean they’ve effectively doubled from their January low. 

However, this optimism doesn’t come without caution, and analyst Adam Jonas went out of his way to flag what his team sees as some of the main near-term risks. These take the form of auto price inflation swinging to deflation, a headwind that an escalation in the ongoing macro and geopolitical turbulence could easily compound.

In a note to clients, he wrote that “with Tesla, there's also the ever-present background risk of 'company specific' idiosyncratic and sentiment-related factors that can also swing this historically volatile name in both directions.”

However, like Berenberg, Jonas feels the company can leverage its cost leadership in the electric vehicle space to achieve greater margins than its competitors. 

Getting Involved

The bear case for Tesla has been, and perhaps always will be, centered around its high valuation. Despite its impressive growth and strong brand, Tesla still trades at a premium price-to-earnings ratio compared to other automotive companies. Even with the stock’s 75% fall, this is still making some investors question whether the company's current price accurately reflects its future earnings potential.

Another concern for the bears is Tesla's production and delivery challenges. While the company has made significant progress in ramping up production, there are still ongoing issues with delivery speed and efficiency.

Additionally, Tesla faces intense competition in the EV market, with established automakers like Ford Motor Company NYSE: F investing heavily in its electric vehicles.

While the company has been successful in capturing a large share of the EV market, there is a risk that its growth could stall as competition increases and consumer demand levels off. These are, however, risks that any industry-leading company worth its salt has to contend with, and in CEO Elon Musk, the bulls see a visionary who can navigate all of this. 

On the whole, Tesla has weathered well the brunt of volatility that has hurt so many other tech companies alongside them. It remains the market leader of an industry set to do nothing but grow, and the stock has a lot of reasons to keep ticking north.