Would I buy the Tesla share after its record profits?

Tesla is going from strength to strength as its record profits in the first quarter of 2021 show. But what are the downsides to the stock?

Manika Premsingh ❯

@macro_think

Manika Premsingh is an economist, financial writer and investor, with a focus on converting macro trends into actionable investment ideas. She has worked in the UK and India with clients across financial services, consulting firms, public sector and non-profits. She has shared her views at multiple international forums and has been widely quoted for them in leading media. Manika is a Masters in Economics and was also a recipient of the Goldman Sachs 10,000 Women scholarship for Certification in Entrepreneurship for her research startup, Orbis Economics. She is on twitter @macro_think

Published 27 April, 2021 5:47 pm BST

| More on: TSLA

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

There is a lot to like about Tesla Motors (NASDAQ: TSLA). It became the first company to really crack the electric vehicle (EV) industry, after it reported full-year profits for the first time last year. It is driving forward clean energy, a big policy agenda. And in the process it is making our planet more liveable.

Tesla reports 2,638% increase in profits!

Moreover, the Tesla share probably looks even more attractive to investors now after it reported record profits in the first quarter for 2021 last evening.

Beating analysts’ estimates, its net income as per generally accepted accounting principles (GAAP) came in at $438mn. This is a huge increase of 2,638% from the same quarter last year. I also like that sequentially it has seen earnings improvement in every quarter for the last four quarters.

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Its revenues have also seen a robust rise of 74% from last year to $10.4bn.

Downsides to the Tesla share

But, there are downsides to Tesla too. These are:

#1. Pricey despite competition: The one thing I cannot wrap my mind around is Tesla’s price-to-earnings (P/E) ratio at 1,187 times. I totally see that EVs are going to be really big in the next decade and that Tesla is leading the industry.

But that is only right now.

Other big automotive companies are also stepping into the sector, which could give Tesla stiff competition in the future. Yet, the likes of Volkswagen, almost 40% of whose car sales last year were EVs (including hybrids), has a miniscule P/E of 15 times.

Even if I try and justify Tesla’s current valuation as a bet on the future of EVs, it should reflect to at least some degree its peers’ valuations as well. And right now, it does not.

#2. The China question: Around 27% of its vehicles were sold in China last year, making it a sizeable market for Tesla. But stresses between the US and China could spoil the party. Fears of its cameras spying on the country have cropped up.

Despite Tesla’s assurances, I am not sure if its popularity in the Chinese market will be sustained. This is especially so as home-grown brands like NIO gain market share. Any weakness in the market could tell on the Tesla share price.

#3. Safety first: Last, but certainly not the least, are safety issues related with Tesla cars. The US auto safety agency is now investigating 27 crashes of Tesla cars according to a Guardian report. Its semi-automated driving system may or may not have played a part in these. If a link is found, it would be a negative for the Tesla share too.