The Disconnect Between Tesla’s Business and Stock Price Continues to Grow Wider

ByFrancoise Ardion

Jul 5, 2022 , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

The macroeconomic and geopolitical backdrop has weighed down the stock market since the start of 2022. Whether it’s surging inflation, the Federal Reserve’s interest rate hikes, or negative side effects from Russia’s invasion of Ukraine, stocks have been absolutely pounded of late. Year to date, the S&P 500 has tumbled 21%, and many investors believe that a recession is becoming increasingly likely.

The sell-off has created many wonderful buying opportunities for prudent investors, however. Many companies continue to shed their market value significantly despite experiencing consistent operational and financial success.

That’s precisely the case for Tesla (TSLA 1.24%) today. The electrical vehicle (EV) king’s business is operating at a high level, but its stock price has contracted 44% since the new year. Corrections are unavoidable, so we might as well exploit them rather than fear them. Here’s why Tesla is a great stock to own today.

Person charging white electric vehicle.

Image source: Getty Images.

The EV leader is firing on all cylinders

Don’t be fooled — Tesla isn’t struggling, financially speaking. In its latest quarter, the EV manufacturer grew total revenue by 81% year over year to $18.8 billion, and adjusted earnings per share rocketed 246%, up to $3.22.

As it continues to scale its operations at a rapid pace, the company’s business is quickly becoming more profitable. In Q1, its GAAP gross margin and operating margin expanded 779 and 1,349 basis points year over year, up to 29.1% and 19.2%, respectively. 

In the wake of high inflation and persistent supply chain bottlenecks, Wall Street analysts are still projecting the company to have a strong year. In fiscal 2022, analysts expect Tesla’s total revenue to surge 58% to $85.3 billion and adjusted earnings per share to jump 77% to $11.99. Those are striking growth rates for a company down 43% year to date, but growth isn’t Tesla’s only highlight.

The company boasts a cash and cash equivalents position of $17.5 billion and a debt position — excluding vehicle and energy financing — of just $100 million. Likewise, the EV juggernaut generated $2.2 billion in free cash flow (FCF) in Q1, representing a staggering 660% climb year over year.

Once viewed as a speculative investment, Tesla has blossomed into a highly profitable business with a sturdy balance sheet and robust cash flow generation. Moving forward, the EV leader is well-furnished to expand its operations and weather any foreseeable economic storm.

A wonderful time to buy

The EV commander looks like a mighty fine investment at the moment. The disconnect between its operational performance and valuation continues to grow wider, serving as a clear buying signal for long-term investors.

Given today’s economic environment, I wouldn’t be surprised to watch this stock continue to fall in upcoming trading sessions. That said, it’s not a good idea to try and time the market — I still think we have been presented with a nice window of opportunity to buy shares of the EV leader. For investors with extended time horizons, it’s time to back up the truck and buy Tesla stock today.