Tesla, Inc. has been the subject of intense debate among investors due to its combination of a high valuation and a recent slowdown in growth. While the company’s premium multiples have been justified by its remarkable growth potential and margin expansion over the past four years, caution is warranted after the Q1 results, which revealed a demand slowdown and a decline in auto gross margin. This article delves into the complexities of Tesla’s current situation, highlighting the challenges posed by the coexistence of growth deceleration and a high valuation.

Growth Potential and Valuation: Despite concerns about Tesla’s valuation multiple, which currently stands at 49x P/E TTM, the company’s strong growth potential and margins have contributed to its higher-than-peers valuation. Tesla’s auto gross margin has shown significant improvement, surpassing that of General Motors and Ford, while its revenue growth rate has outperformed these competitors as well.

Demand Slowdown and Margin Compression: However, the Q1 results raised red flags, indicating a demand slowdown and margin contraction. The auto gross margin fell below the street consensus of 20%, while the adjusted EBITDA margin also contracted. These developments, coupled with ongoing price reductions, have led to concerns about future revenue growth and margins. The management’s earlier statements about order intake rates and potential delivery targets have been contradicted by subsequent price cuts and the absence of an increase in the 2023 deliveries target.

Downward Revisions and Hedging Strategies: The downward revisions in revenue estimates and earnings projections further highlight the prevailing concerns surrounding demand slowdown and macro headwinds. Investors may consider hedging against potential downside risks using options, particularly given that Tesla’s implied volatility is currently at a one-year low. Protective put hedging strategies can provide some downside protection while allowing for potential upside capture.