- Tesla (TSLA) stock can recover but first understand why it has fallen.
- The company’s latest earnings report showed lots of strength.
- The case for relative value has merit even as Tesla stock has been historically overvalued.
Bears and contrarians are quick to note that Tesla (NASDAQ:TSLA) stock is off by 45% year-to-date. Their motives differ of course. Bears would like investors to believe that share prices will continue to move toward the low analyst target price of $250.
Meanwhile, contrarians would tell investors the upside — 58% — between Tesla’s current price and the consensus target price make it too good to ignore. Who should investors follow?
The contrarians. In other words, the bulls.
| TSLA | Tesla | $623.90 |
How Did We Get Here?
The answer to why Tesla — and most other tech firms — have fallen so precipitously in 2022 is due to the Federal Reserve’s policy shift.
Tech companies including Tesla are valued based on the current discounted value of their future profits. The value of those discounted profits decreases as bond yields rise.
When the Fed increases interest rates and cuts back its bond buying program those bond yields rise, and tech companies lose their shine. That’s why any hint of Fed rate hikes is met by capital flight from the tech sector.
In other words, that’s why Tesla has fallen so far and so swiftly.
And investment bank Nomura is now under the belief that the Fed will enact 75 basis point hikes in June and July. That should mean that Tesla will fall further based on the economic arguments above.
So, what exactly do investors have to be bullish about?
Fundamental Improvement
It’s difficult not to take several positives from Tesla’s most recent earnings report. My thesis is that these positives will soon outweigh the negatives poised by Fed policy and its effect on the tech sector. Further, I’d assert that the markets will soon begin to send capital back into worthy tech firms and that the wreck will dissipate. And Tesla, and TSLA stock, is tech worth investing in.
That is predicated on the strength of Tesla in the most recent earnings report. The company sold $16.86 billion of vehicles, 87% more than a year prior. It also made a margin of 32.9% on those vehicle sales, a 6.36% improvement on a year-over-year basis.
On top of that, free cash flow (FCF) reached $2.2 billion in the quarter which was much, much higher than the $293 million a year prior. That means Tesla started this quarter with $2.2 billion more in cash.
Could TSLA Stock Be a Value Play?
Tesla can hardly be considered a value play. After all, its current price-to-earnings (P/E) ratio is worse than that of 92% of its industry peers.
However, at 84.29 its P/E ratio is far lower than the 451.87 median P/E ratio Tesla has sported over the past 10 years. Sure, we’re in a downtrend right now. Sure, there’s no clear signal that we won’t be in this for much longer yet. But tech will rebound. And TSLA stock will as well.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
