Shares of electric-car maker and clean energy company Tesla (TSLA -4.23%) were hammered last week, falling more than 11%. Though much of this pullback was likely driven by a broader-market sell-off, including a nearly 4% pullback in the Nasdaq Composite, some may have been due to growing concerns about how vehicle demand will fair in a high interest rate environment.
But with shares declining so substantially, it’s worth considering whether or not the growth stock has now appropriately priced in some of the risks of operating in this uncertain environment. In other words, does the decline make the stock a buy? On the other hand, could it simply be flagging some legitimate concerns, giving investors a good reason to avoid investing in it?
An undeniable headwind
The Federal Reserve’s commentary last week when it announced it was keeping fed funds interest rates unchanged after hiking them at an unprecedented speed to a targeted range of between 5.25% and 5.5% featured a mostly hawkish tone — one worrying for auto investors.
Fed Chair Jerome Powell’s message was clear: The Federal Reserve remains in a stage where it’s still deciding whether to hold rates or to continue increasing them. Not until data indicates to the Federal Open Market Committee that holding rates steady is the right choice will it begin asking a new question: “How long should the Committee hold rates steady?” Ultimately, Powell’s commentary implied that rates could remain high for an extended period.
All of this to say, the incremental headwind to demand for auto loans implied by Powell’s sentiment last week is significant. Tesla stock’s pullback during the week, therefore, made sense.
Keep a long-term view
A high-interest rate environment undoubtedly pressures the consumer — particularly when seeking to secure loans. A higher-for-longer funds rate policy will almost certainly negatively impact demand for car loans. But investors looking beyond the current macroeconomic cycle notably may have less to worry about than shortsighted traders.
Sure, things could get worse before they get better. The economy could transition from one mired in uncertainty to one slammed by a recession. But Tesla’s long-term catalysts are as robust as ever: An accelerating transition to electric cars, increasing integration of software in vehicles, and rapidly growing demand for energy storage products.
Putting the spotlight on the real numbers behind each of these tailwinds, consider these facts:
- Capturing the momentum in the transition to electric vehicles, Tesla’s trailing-12-month deliveries are up 47% year over year.
- The growing importance of software in cars is evident in Tesla’s pricing power: The company’s popular “Full Self-driving Capability” software upgrade, which enables the car to drive itself with minimal driver intervention, commands a staggering price tag of $12,000.
- Showing the market’s huge appetite for energy storage, Tesla’s energy storage deployments (measured in gigawatt-hours) soared 222% year over year in the second quarter of 2023.
With so much momentum in its business, a high interest rate environment may slow Tesla down for some time. But the underlying strength in the catalysts driving Tesla’s business are too strong to stop. And if a recession does ensue, it could lead to pent-up demand and ultimately a reacceleration in the company’s growth rates when the economy finally recovers. Further, with $23 billion of cash on its balance sheet and a highly profitable business, Tesla will likely continue investing aggressively in its business during any market cycle, positioning it to take substantial market share on the other side of a recession.
So, is Tesla stock a buy after pulling back 10%? For the investor who cannot handle volatility or for the trader with a time horizon shorter than five years, probably not. But for the long-term investor, a challenging economy could actually help Tesla gain market share at an even faster rate; for this investor, today’s pullback may prove to be a good buying opportunity.
Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.