These Charts Show Why Tesla Is Ahead of the Competition

The question every Tesla (TSLA -2.57%) bull or bear must answer is: “How should we compare Tesla to other automakers?” Depending on what side you’re on, your answer can vary significantly.

Fourth-quarter results show that it’s still way ahead of the competition in multiple aspects, but is it enough to warrant the stock’s premium valuation? 

Tesla has fundamental advantages over traditional automakers

In the fourth quarter, Tesla saw strong revenue growth of 37%, with automotive sales (which make up 83% of its total sales) rising by 35%.

Inforgraphic showing Tesla's revenue streams.

Image source: The Motley Fool.

Comparing this revenue growth to other automakers, it’s clear that Tesla still holds an advantage.

TSLA Revenue (Quarterly YoY Growth) Chart

TSLA Revenue (Quarterly YoY Growth) data by YCharts YoY = year over year.

Furthermore, while other automakers’ revenue growth rises and falls from quarter to quarter, Tesla’s growth has constantly remained ahead of everyone else. With management guiding for production of around 1.8 million cars this year (it produced 1.37 million in 2022), it will continue to grow sales rapidly if it can sell its product.

But recent events have called that into question.

In January, Tesla cut prices. While the reasons behind these cuts are numerous, the company will bring in less revenue because of them. Due to fixed costs, its best-in-class profit margins will take a hit. But chief financial officer Zach Kirkhorn said during the fourth-quarter conference call that its automotive gross margin will remain above 20%, which is still greater than the competition’s.

TSLA Gross Profit Margin Chart

TSLA Gross Profit Margin data by YCharts

Because Tesla has more wiggle room with its margins than others, it can afford to make less money on each car it produces. This allows it to essentially undercut electric vehicles (EVs) made by more premium competitors while bringing its prices closer to other EVs like the Mustang Mach-E and Chevrolet Bolt.Furthermore, Tesla’s price cuts (then a slight rise) brought the Model Y’s price to $54,99, just under the threshold needed for the $7,500 tax incentive from the Inflation Reduction Act.

This advantage will be crucial in the coming decade, but is this enough for investors to take a position in Tesla’s stock?

The stock is still expensive, although it returned to reality for a split-second

If there’s one chart that summarizes the bear case on Tesla’s stock, it’s this one:

TSLA PE Ratio Chart

TSLA PE Ratio data by YCharts

This massive premium to other automakers makes it easy to claim that Tesla is overvalued compared to traditional competitors. Even at its lowest point right after the new year, the company maintained a near 200% premium in terms of valuation over Toyota.

However, because of its substantially better profit margins and consistently higher growth rate, investors are willing to give Tesla a premium valuation.

But with Wall Street analysts projecting earnings per share to fall this year due to the price cuts, Tesla’s valuation will only get more expensive if the stock stays at the same price. And as revenue growth slows thanks to the law of large numbers (the larger you are, the more challenging it becomes to grow), the rate at which the company can grow earnings is slowing.

So should investors buy now? I’d say no. Picking up shares during January, when it was reasonably valued, would have been OK. But without a time machine, investors are forced to pay a 69% premium to what Tesla entered 2023 at. 

With patience, I think the company’s competitive advantages are strong enough that investors can pick up shares during different price drops throughout the year, since Tesla’s stock is very volatile. The stock is slated for excellent long-term performance, but now isn’t the right time to grab shares.

Keithen Drury has positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.