Should you buy Tesla stock?

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Tesla just reported earnings for Q4 and 2022. Full year revenues increased 51% to 81.5 billion, net income more than doubled to 12.6 billion and free cash flow rose 51% to 7.6 billion.

The news sent the stock up more than 10%, giving the company a market cap of 506 billion dollars. With 22 billion in cash and 6.9 billion in debt, the enterprise value is 491 billion.

That means the company is valued at 6 times revenue, 65 times free cash flow or 40 times earnings.

A 40 times earnings multiple is not cheap but it's certainly more reasonable than the 100 times earnings that we saw last year. Especially when you consider a revenue growth rate of over 50%.

So the important question for Tesla shareholders is whether the company can continue that growth going forward while maintaining its strong profit margins.

A big deal was made recently about Tesla cutting prices on the Model 3 and Model Y with videos showing angry customers in China protesting and requesting refunds.

Price cuts are often an indicator of slowing demand and a need to shift product. And that poses questions for the upcoming quarters.

However, the Tesla shareholder letter explains that “prices have been on a downward trend for years and are necessary for the company to become a multi-million vehicle producer.” Later, Musk said on the earnings call that demand in January had been the strongest ever.

As long as Tesla’s brand and margins remain intact, dropping prices allows the company to reach greater scale, which can further cement its position as market leader.

But with legacy automakers slowly getting their act together, it wouldn’t be a surprise to see Tesla’s margins and influence come under at least some pressure.

Combine that with a difficult economic environment and there are still major headwinds to Tesla stock while it trades at this valuation.

We published a TikTok last year arguing that Tesla was overvalued at 100 times earnings and I gave it a bearish rating. But at 40 times earnings it’s much harder to make that case.

Recent events have painted Tesla in a negative light but the numbers from the company don’t yet show material weakness. Even so, 40 times earnings is too rich to buy the stock. For these reasons, I currently give the stock a neutral rating.

But these are my personal opinions not financial advice and I do own a small amount of Tesla stock.