Tesla (NASDAQ:TSLA) stock has, in my opinion, been overvalued for years now. However, with the shares dropping 70% in 2022, has the price finally reached a realistic valuation for the company?
Despite the massive price drop, I think it could still be too early for me to jump on the Tesla train. Here’s why!
Tech company or car company?
There have been two schools of thought on Tesla as a company in the last few years. One is that the electric car maker is a big tech company that makes cars. The other is that Tesla is a car company with a technological lead compared to the competition.
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The distinction might not matter to owners of Tesla cars, but I think it’s one of the reasons for the massive valuation that the company achieved.
In 2021, Tesla surpassed a $1trn market cap, making it more valuable than Toyota, Volkswagen, Daimler, BMW, Ford, and General Motors combined. It achieved that valuation despite selling around 500k cars in 2020, compared to those competitors shifting a combined 30m units.
Tesla’s share price has always seemed to follow the trends of tech stocks like Apple and Alphabet instead of the car companies with which it is competing.
In recent years, I could justify the high share price if I were to look at Tesla as a tech company. However, it seems overvalued when considering it, first and foremost, as a car company.
I believe the Tesla stock price was based more on speculation than anything concrete, like earnings. At one point, the company’s price-to-earnings (P/E) ratio was stratospheric at 359. Today, the P/E ratio sits at a more reasonable 35.
Free falling
A year or two ago, $110 for a share of Tesla with a P/E of 35 would have been an instant buy for me. However, the car market isn’t the same as it was just a couple of years ago.
Tesla is no longer the king of electric vehicles (EVs). Gone are the days when it was the only good electric option or even the best EV.
The big manufacturers gave Tesla a massive lead when they were collectively slow to enter the EV market with anything as compelling as what Tesla had to offer.
Now that the EV market has matured, there are signs that demand for Tesla vehicles is slowing.
In the last quarter of 2022, the company delivered around 6% fewer vehicles than estimated. It’s one of the first clear signs that Tesla’s production ability isn’t limited but that demand is dropping.
The increased competition from big manufacturers looks to have finally caught up with Musk’s company.
If I were to buy Tesla shares now, I would need to see that demand is still trending upward. I think that’s the only way the company could justify its 35 P/E ratio. As demand is beginning to wane, I don’t think we’re at the bottom for Tesla.
Therefore, I won’t buy any Tesla stock, but I will keep an eye on the company and its P/E ratio.
