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Shares of electric car maker Tesla (TSLA -0. 57%) have seen an absolute expansion in 2024, emerging more than 70% at the time of writing. This erased the S&P 500’s 25% gain in that period. As expected, the massive gain generated a lot of excitement around the stock. Driving bullish sentiment on stocks, Tesla CEO Elon Musk has been praised for his collaboration with President-elect Donald Trump, and the company is seen as a major beneficiary of artificial intelligence as it works on autonomous driving technology and robots.
But is the stock’s recent gain more representative of hype or substance? After all, even a great company’s stock can become overpriced if investor expectations become too optimistic.
Let’s read whether Tesla stock looks attractive at its current price.
Fundamentally, the automaker’s business is strong. Long gone are the days when the company was burning through cash. These days, Tesla’s a cash cow. Free cash flow in the company’s most recent quarter came in at more than $2.7 billion, growing 233% year over year. This helped bring Tesla’s total cash and investments at the end of the quarter to approximately $33.6 billion.
While this track record and the company’s profitability give it some staying power, the key to any bullish thesis for Tesla stock is a positive vision of a near-sci-fi future. Investors believe the company’s advancement in AI software and hardware will result in an autonomous network of Tesla vehicles, adding an Uber-like profit stream for the company. Additionally, investors expect an immediate and continued expansion in sales of electric cars, electric garages and solar products. The most sensible thing about all of this is that there is hope that the high-profile tech giant can make money selling humanoid robots.
While the bull case for Tesla stock is fun to think about, other more skeptical investors worry there’s too much speculation and hope baked into the stock price today. Shares trade at a price-to-earnings ratio of about 118 at the time of this writing. A valuation like this leaves little room for potential setbacks, whether they are company, industry, economic, or geopolitical related.
Additionally, while Tesla’s overall business appears strong, its shielding has recently suffered a problem. Auto sales have slowed recently as high interest rates restrict consumers’ borrowing power. Tesla’s auto profits rose just 2% year over year in the third quarter. Such anemic expansion leaves a lot to be desired, given the stock’s current valuation. Furthermore, it should be noted that even though Tesla has other activities besides cars, it is still primarily an automobile manufacturer. Auto sales accounted for about 79% of its total sales in the third quarter. So, as long as higher interest rates make vehicle affordability a challenge for consumers, Tesla can continue to revel in below-average earnings expansion rates.
That said, while Tesla is a great company with a bright future, there’s no point in sitting on the sidelines after the stock’s big rally. However, if the stock pulls back especially at some point in 2025, it’s probably worth buying. After all, Tesla has a long history of strong expansion and proper execution, and is well positioned in growing markets such as electric cars and synthetic intelligence.
Daniel Sparks and/or his people have positions at Tesla. The Motley Fool rates and recommends Tesla. The Motley Fool has a disclosure policy.
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