Tesla Stock Is Soaring. Time to Buy?

Tesla (TSLA 2.21%) is serving up investors quite the rebound. After the electric-car maker’s stock fell 65% last year, shares seem to have found a floor more recently. The stock has climbed 30% year to date. Part of this move higher was driven by the company’s fourth-quarter earnings report, which highlighted Tesla’s recent financial momentum and management’s optimistic expectations for this year.

The stock’s sharp rise in 2023 likely has many investors looking closely at the stock. Is Wall Street’s growing appetite for Tesla shares a sign of more good things to come, or does the stock’s big move higher mean investors who didn’t buy the stock when it bottomed earlier this year missed out?

Incredible growth

Tesla stock’s performance last year didn’t reflect its business performance over that time. The company’s record-breaking 2022 features huge growth in vehicle deliveries, revenue, and earnings, even as Tesla grappled with rising interest rates, global supply and logistics constraints, a temporary factory closure in China, and intensifying competition.

Driven primarily by a 40% year-over-year increase in deliveries, Tesla’s 2022 revenue increased 51% year over year and earnings per share more than doubled. Free cash flow also soared, rising 51% year over year to almost $7.6 billion.

Looking to 2023, Tesla expects more strong growth. The company guided for annual vehicle production to increase about 31% year over year to 1.8 million units. Management stated that demand for its vehicles remains high and orders are trending ahead of production. As a result, Tesla likely hopes to deliver almost as many vehicles as it produces.

Deliveries equal to management’s production guidance would translate to a year-over-year growth rate of about 37%. However, Tesla CEO Elon Musk said in the company’s earnings call that the company could potentially build around 2 million cars this year if there are no major disruptions to production or other unexpected challenges. 

A reasonable valuation

So should investors buy the stock to take part in Tesla’s business momentum? After all, shares are still well below levels they were trading at 12 months ago.

While shares are still much cheaper than they were a year ago, they don’t appear to be trading in bargain territory. The growth stock currently trades at about 66 times Tesla’s free cash flow. A valuation multiple this high means the stock is priced for strong growth for years to come.

Tesla’s strong business momentum, however, suggests that the underlying business could grow into the stock’s current valuation. After all, the company believes it can average a 50% annualized growth rate in vehicle deliveries (with some years coming in below this growth rate and others coming in above it) for the foreseeable future.

Overall, Tesla stock doesn’t look like an obvious buy today, but it also doesn’t look like a sell. Further, investors who really believe in the company may want to consider allocating a small percentage of their portfolio to the stock. After all, at least the stock’s valuation appears reasonable and not grossly overvalued.

The key word here, however, is “small.” Growth stocks like Tesla are risky, largely because rosy expectations are already baked in. If things don’t go as well as planned, the stock could underperform. Further, any investors who buy shares of this high-flying stock should expect a bumpy ride; the stock is notoriously volatile.

Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.