Should You Buy Tesla Stock Before Jan. 29?
Tesla's stock has surged 100% over the past year, but concerns loom as the company faces slowing revenue growth and declining profit margins. Deliveries have stalled, and significant price cuts have impacted margins, with operating margins at 8.5%. Despite ambitious plans in solar, self-driving, and AI, skepticism remains about their impact on financial performance. With a high P/E ratio of 111 and unclear growth prospects, buying Tesla stock before its Q4 earnings report on Jan. 29 appears risky for long-term investors.
It feels like the investing world took the spotlight off of Tesla (TSLA -1.41%) in 2024. Investors were enamored with artificial intelligence (AI) stocks such as Nvidia and Palantir. Tesla's CEO Elon Musk has been focused on other endeavors -- both business and political -- over the last few quarters. With the excitement around electric vehicles (EVs) fizzling out and growth stalling in the industry, Tesla shareholders (and perhaps the CEO himself) seem to have lost enthusiasm for the company.
And yet, as I write this today, shares of Tesla stock are up 100% in the past 12 months. The EV maker and technology company has crushed the market and trades at a market cap of $1.3 trillion. It is set to report its fourth-quarter earnings on Jan. 29 after the market closes. Should you buy shares before the earnings report? Let's take a closer look.
Slowing revenue growth, declining profit margins
When analyzing Tesla stock, we need to first look at how many cars it is selling to customers each period. Historically, the company was growing its unit volumes like gangbusters, but in 2024 it faced a slowdown. Tesla's trailing-12-month deliveries have stalled out for a few quarters now. In fact, deliveries in 2024 were lower than in 2023. That is a huge slowdown surely impacted by slowing market-share gains for the EV category, especially in the United States.
More concerning is the fact Tesla has implemented large price cuts in order to get products out the door. Over the last 12 months ending in Q3 of 2024 (we get Q4 numbers this week), Tesla's gross margin was 18%, and operating margin was only 8.5%. This operating margin figure is just around half the level the company hit a few years ago, which is a troubling development for the company.
Given the price cuts and slowing deliveries, we shouldn't expect anything radically different when Tesla reports its Q4 financials. Revenue growth will be weak at best, and profit margins likely will still be much lower than where they were a few years ago.
Ambitious but confusing growth plans
The EV business is not performing too well at the moment. Tesla investors like to remind you, though, that the company has ambitions to be more than just an EV maker. It is working on solar technology, commercial battery cells, self-driving technology, and what it calls the Cybercab, as well as AI and humanoid robot research.
All these innovations sound exciting. In fact, the company is growing its battery cell business quite quickly (although it is not going to be meaningful for a stock valued at $1.3 trillion). However, the product roadmap should leave investors skeptical that these will be material to Tesla's financial performance in the coming years. For one, Tesla has been promising self-driving cars for a long time, as well as the infamous robotaxis. They still have not shown up yet. The humanoid robot called Optimus looks like a great idea but seems far from being implemented. There has been some fantastic reporting that the demonstrations for Optimus were exaggerating Tesla's technology in the humanoid robot field.
What perhaps is the most concerning is Tesla's lack of investment in AI. Elon Musk has founded a separate company called xAI which has raised $6 billion in funding. Is his focus on AI going to be at Tesla or in an entirely separate company? If it is all going to be in this new enterprise, that clearly would not be good for Tesla's business.
TSLA Operating Margin (TTM) data by YCharts
Should you buy Tesla stock today?
Looking at the facts above, it is hard to be optimistic about Tesla's business right now. The EV segment is sputtering, and it is unclear what value these new segments will bring, or if Musk will even implement them at Tesla.
These may not be the most concerning things about Tesla stock. What pops out the most is the company's valuation. It currently trades at a price-to-earnings ratio (P/E) of 111, which is close to four times the S&P 500 index average. This is for a business that isn't growing quickly, is seeing declining margins, and has made little to no progress in diversifying its operations.
Whether Tesla beats or misses on its earnings per share (EPS) targets -- which will affect the stock price movement the following day -- Tesla stock looks like a risky bet at today's prices for those looking to buy and hold over the long term. It seems prudent to avoid buying Tesla stock before its Q4 earnings update.