Is Tesla a Buy Under $600? Electric vehicle (EV) maker Tesla's (TSLA) shares are currently trading significantly below their $900.40 all-time high, which they hit in January 2021. The price decline can be attributed primarily to the problems TSLA is facing because of a global semiconductor shortage. The question is, given the EV industry's immense growth potential and TSLA's dominant position in the market, is it wise to buy the stock at the current price level? Let's find out.

Tesla, Inc. (TSLA) is known for its electric cars, such as Model 3, Model Y, Model X, Model S and Cybertruck. The company also designs, manufactures, installs and sells solar energy generation and energy storage products, and it is expected to expand into the restaurant business space as well. However, TSLA has been associated with many controversies and is facing several challenges, including vehicle recalls and a global semiconductor shortage.

The stock has lost more than 15% so far this year to close Friday's trading session at $599.05, 33.5% below its 52-week high.

Company CEO Elon Musk said this month that TSLA has been forced to raise the prices of its cars due to a global shortage of computer chips. This could affect its sales. Also, the company is losing its market dominance in China as Chinese electric vehicle (EV) makers ramp up their production. Musk is also being scrutinized by the SEC for his tweets. It is speculated that his tweets have violated the terms of a settlement agreement that required him to have his tweets pre-approved by the company's lawyers. So, we think TSLA's near-term prospects seem uncertain.

Click here to checkout our Electric Vehicle Industry Report for 2021

Here are the factors that we think could influence TSLA's performance in the upcoming months:

Increasing Demand for EVs

The EV revolution is well underway with governments worldwide taking measures to transition their nations to an EV-driven sustainable future. According to the World Economic Forum, despite a 16% decline in overall car sales across the world, electric car registrations were up 41% in 2020.

President Biden is pushing for measures that include battery recycling and aims to have most U.S.-manufactured cars be electric by 2030. The global EV market is expected to grow at a 21.6% CAGR between 2020 - 2027, according to Market Research Future report. So, as one of the top EV players globally, TSLA could benefit significantly from the industry tailwinds.

Robust Financials

TSLA's top line surged 73.6% year-over-year to $10.39 billion for the first quarter, ended March 31, 2021. The company's automotive revenues for the quarter were $9 billion, up 75.4% year-over-year. Its operating margin increased 99 basis points to 5.7%. Its non-GAAP net income increased 363.4% year-over-year to $1.05 billion. Its non-GAAP EPS came in at $0.93, which represents a 304.3% year-over-year rise.

Losing Market Share

According to a Reuters report published on June 4, 2021, TSLA's vehicle orders in China nearly halved in May from April. SAIC-GM-Wuling Automobile Co.'s Hongguang Mini has surpassed TSLA's sales in almost every month since July 2020. The company is losing market share in China to other companies also, such as Li Auto Inc. (LI) and NIO Inc. (NIO).

In fact, TSLA is facing intense competition from various EV companies worldwide. It was trailing behind Ford Motor Company's (F) Mustang Mach-E sales in Norway in May 2021. Moreover, the company recalled nearly 6000 vehicles in the United States on June 3, 2021, due to lose brake caliper bolts that could cause low pressure in the tires.

Lofty Valuation

In terms of its forward non-GAAP P/E ratio, TSLA's 130.66x is 653.1% higher than the 17.35x industry average. The stock's forward EV/Sales and P/S of 11.63% and 11.69%, respectively, are higher than the 1.56% and 1.35% industry averages.

POWR Ratings Don't Indicate Enough Upside

TSLA has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. TSLA has a C grade for Quality. This is justified given that its 9.84% trailing-12-month levered free cash flow margin is higher than the 7.97% industry average. But its 21.18% trailing-12-month gross profit margin is lower than the 34.55% industry average.

The stock has a D grade for Stability. Moreover, TSLA has an F grade for Value, in sync with its higher-than-industry valuation ratios.

TSLA is ranked #38 of 57 stocks in the C-rated Auto & Vehicle Manufacturers industry. In addition to the POWR Ratings grades I've just highlighted, we've also rated it for Sentiment, Growth and Momentum. Get all the TSLA ratings here.

Better than TSLA: Click here to access 25 top-rated stocks in the same industry.

Bottom Line

TSLA's shares are currently trading 33.5% below its $900.40 all-time high, which it hit on January 25, 2021. However, it still looks expensive because the company is losing its market share in China, which is one of its key markets. Tesla also had to recall several vehicles due to technical issues. So, we think it is better to wait for a better entry point in this stock.

Click here to checkout our Electric Vehicle Industry Report for 2021

TSLA shares were trading at $586.56 per share on Monday morning, down $12.49 (-2.08%). Year-to-date, TSLA has declined -16.88%, versus a 13.20% rise in the benchmark S&P 500 index during the same period.

Tesla is part of the Entrepreneur Index, which tracks 60 of the largest publicly traded companies managed by their founders or their founders' families.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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