Over the past couple of months, the Tesla (NASDAQ: TSLA) share price has plunged in value. Year-to-date, the stock is off around 34%.
Now sitting short of $800 per share, the stock has not traded below this level consistently since the third quarter of 2021.
Tesla share price outlook
I have long believed the company is revolutionising the electric vehicle (EV) market. And it seems as if the market has agreed with me, at least until this point.
However, while the market might not agree that the company is changing the world, its fundamentals support that conclusion. The number of vehicles rolling off its production line is set to hit an all-time high this year. Further production records seem likely as the demand for Tesla vehicles is only expanding.
Indeed, according to analysts, the current Ukraine crisis and higher petrol prices will only lead to further demand for EVs.
With this being the case, I have been taking a closer look at the Tesla share price to see if it offers value at current levels.
After reporting losses for virtually its entire life, during 2020, the company declared its first profitable year.
Net profit hit around $700m in 2020 as the corporation capitalised on the growing demand for EVs around the world.
According to Wall Street analysts, the company’s sales and profits are expected to increase further over the next two years.
After the group reported a net profit of $5.5bn in 2021 on revenues of $54bn, analysts expect a net profit of around $12bn in 2022 and $14.5bn in 2023 on sales of $104bn.
Based on these targets, the stock is trading at a 2023 forward price-to-earnings (P/E) multiple of 63. That still makes the company the most expensive car manufacturer in the world.
Some investors might argue that the stock is overvalued at current levels. I can see why they might believe that. However, the group is also one of the most profitable car manufacturers globally. Its operating profit margin of 12% reported for 2021 is in the top 10% of companies in the automotive sector.
I think this profitability deserves a significant premium valuation.
The bottom line
The Tesla share price is trading at a premium multiple. It is also facing significant challenges. The global supply chain crisis and competitive forces are having an impact on the group. These challenges are not likely to disappear any time soon.
Still, considering the company’s growth potential over the next few years, profit margins and current valuation, I think the Tesla share price does offer value at current levels.
That is why I would buy the shares as a long-term play on the EV market. I think this market will only expand over the next decade, and I want to have some exposure to the industry.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.