Shares of electric-car maker Tesla (TSLA -4.95%) have been on an absolute tear in 2024, rising more than 70% as of this writing. This obliterated the S&P 500's 25% gain during this time. The huge gain has unsurprisingly sparked a lot of excitement around the stock. Fueling upbeat sentiment for shares, Tesla CEO Elon Musk has been praised for cozying up with President-elect Donald Trump, and the company is viewed as a major beneficiary of artificial intelligence as it works on autonomous driving technology and robots.
But is the stock's recent gain more representative of hype or substance? After all, even a great company's stock can become overpriced if investor expectations become too optimistic.
Let's examine whether Tesla shares look attractive at their current price.
The bull case
Fundamentally, the automaker's business is strong. Long gone are the days when the company was burning through cash. These days, Tesla's a cash cow. Free cash flow in the company's most recent quarter came in at more than $2.7 billion, growing 233% year over year. This helped bring Tesla's total cash and investments at the end of the quarter to approximately $33.6 billion.
While this balance sheet and the company's profitability give the company staying power, the key to any bull thesis for Tesla stock is a rosy view for a science fiction-like future. Investors are betting that the company's artificial intelligence software and hardware product development will culminate in an autonomous network of Tesla vehicles, adding an Uber-like revenue stream for the company. In addition, investors are looking for continued rapid growth in electric car, energy storage, and solar product sales. On top of all of this, there is hope that the far-reaching technology giant can make money by selling humanoid robots.
The bear case
While the bull case for Tesla stock is fun to think about, other more skeptical investors worry there's too much speculation and hope baked into the stock price today. Shares trade at a price-to-earnings ratio of about 118 at the time of this writing. A valuation like this leaves little room for potential setbacks, whether they are company, industry, economic, or geopolitical related.
Even more, while Tesla's overall business does look strong, there's been a kink in its armor as of late. Automotive sales have hit a speed bump recently as high interest rates limit consumer borrowing power. Tesla's automotive revenue only rose 2% year over year in Q3. Anemic growth like this leaves much to be desired, given the stock's current valuation. Further, it's worth emphasizing that while Tesla does have other businesses beyond autos, it's still primarily an automaker. Automotive sales accounted for about 79% of its total sales in Q3. So, as long as higher interest rates make vehicle affordability a challenge for consumers, Tesla could continue to see subpar revenue growth rates.
Wait for a pullback
With all of this said, even though Tesla is a great company with a bright future, there's nothing wrong with staying on the sidelines after the stock's enormous run-up. If shares pull back meaningfully at some point in 2025, however, the stock is probably worth buying. After all, Tesla has a long history of strong growth and great execution, and it is well-positioned in attractive growth markets, namely electric cars and artificial intelligence.
