Down almost 30% in the past month, here are 2 reasons to buy Tesla shares and 1 reason to hold off

Is the EV king heading for a major correction?

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

The valuations of growth stocks have been tested lately in the wake of unprecedented inflation levels, hiked interest rates, and the economic impacts of Russia's invasion of Ukraine. The Nasdaq Composite has descended 28% year to date, and the Cboe Volatility Index -- commonly referred to as Wall Street's fear gauge -- has soared nearly 80% in the same time frame, highlighting investors' uneasiness at the present moment. 

Tesla (NASDAQ: TSLA), one of the most polarizing stocks on Wall Street, has joined the sell-off by shedding 41% of its value since the start of the year. The EV leader's market capitalization eclipsed $1 trillion in late 2021, but the stock has since backpedaled, settling at a $738 billion market cap today. Will the Elon Musk-led company return to the $1 trillion zone, and if so, when? While macro headwinds and Musk's dramatic potential takeover of Twitter surely haven't helped Tesla, the EV giant's business continues to make headway in a grand fashion.

On that note, let's discuss two reasons to consider buying Tesla stock today and one justification for holding back.

Buy: Business is booming

In a quarter rife with macroeconomic challenges and COVID-related shutdowns in its Shanghai factory, Tesla delivered big for its shareholders. The company raked in total sales of $18.8 billion, growing 81% year over year and beating Wall Street estimates by 5%.

Likewise, earnings per share (EPS) finished at $3.22, climbing 246% and smashing consensus forecasts by a whopping 42%. The EV commander produced 305,407 vehicles and completed 310,048 deliveries, adding to the already-strong quarter with respective increases of 69% and 68%. 

Per management's guidance, investors can expect the company to achieve 50% average annual growth in vehicle deliveries over a multi-year time horizon. For the full fiscal year 2022, Wall Street analysts are projecting the company's top line to surge 61% year over year to $86.3 billion and EPS to mount 81%, reaching $12.31.

Given that Tesla's factories have been operating below capacity for several quarters and will continue to do so throughout 2022, the company's growth amid such setbacks is nothing short of remarkable. Its robust balance sheet reveals a 660% year-over-year increase in free cash flow generation, rising to $2.2 billion in the first quarter of 2022 from $293 million in the year-ago period. All told, the EV juggernaut is in an advantageous position to expand its operations in the years to follow. 

Buy: Massive industry potential

Tesla brings a lot of mainstream attention to the EV market, but don't be fooled: the industry is still in its early innings. As of today, there are more than 10 million electric vehicles on the road, but that represents just 1% of global car stock. By 2030, it's projected that there will be 300 million electric cars on the road, a 2,900% upsurge from existing levels. It's also expected that EVs will account for 60% of new car sales by then, a drastic increase from 5% in 2020.

On a broader scale, the global EV market is set to register a compound annual growth rate of 25% through 2030, indicating a market size of nearly $1 trillion by that time. While competition is heating up tremendously, Tesla is well-positioned to remain a winner in the years to come. In 2021, the company was responsible for almost 70% of registered EVs in the U.S. and it reigns over nearly 15% of the global EV market. In other words, it's not Tesla that investors should worry about when considering increased competition in the industry.

Stay away: Steep valuation

At face value, Tesla's valuation appears outrageous. The stock is trading at 95.8 times earnings today, indicating a lofty valuation in and of itself. Comparing the EV giant's price-to-earnings (P/E) multiple to that of other automobile manufacturers paints an even clearer picture.

TSLA PE Ratio Chart

TSLA PE Ratio data by YCharts

Competitors Ford, General Motors, and Toyota carry price-to-earnings multiples of 4.5, 6, and 8.5, respectively, serving steep discounts compared to their EV peer. Whether Tesla warrants a premium valuation is a classic debate; however, there's no denying that the stock is richly priced today.

Should you buy Tesla?

Tesla is a great company, but its latest pullback has grabbed my attention. That said, it's still trading at a steep valuation and would need to suffer a far greater correction to be considered cheap. Although Tesla continues to make fantastic strides on the financial front, I'd hold off on buying the stock for now. Not only are there more actionable opportunities available on the market today, but there is also a good chance that macro headwinds and Twitter-related drama drag this stock down further in the coming quarters.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Luke Meindl has positions in Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla and Twitter. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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