It has been a very strong few months for carmaker Tesla (NASDAQ: TSLA). The electric vehicle specialist has seen its value increase by over three-quarters so far in 2023. Despite that strong performance, Tesla stock is actually 48% below its level of a year ago.
What’s going on – and ought I to invest, even after the recent rally?
Story and fundamentals
Tesla is a high-profile company in strong growth mode. It has a market capitalisation to match, nearing $600bn.
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I think the company represents an extreme example of what is seen with many stocks. Some investors get excited about what they see as the ‘story’ of a business — its potential. Others are more focused on what are known as fundamentals, or the hard data capturing current business performance.
Both approaches have a role to play when valuing shares, in my view. Especially for a company growing quickly like Tesla, today’s business results are only part of the story of its long-term opportunity. They do help bring real world perspective though.
Tesla stock has long reflected a tussle between investors who see it as overvalued due to its fundamentals – the price-to-earnings ratio is over 50 – and those who think its investment case is all about a long-term story.
Firing on all cylinders
One of the reasons I think it has had a strong 2023 so far is that the fundamentals are actually moving closer to the long-term story.
Revenue last year grew by over 50%. New production capacity, such as its German factory, should mean production volumes can keep growing strongly. After making losses consistently until three years ago, last year Tesla more than doubled its net income to $12.6bn.
If it can keep up such growth rates, I think the current Tesla price actually looks cheap. The company benefits from a strong brand, proprietary technology, ballooning user base and increasing demand for electric vehicles.
However, growth can be expensive. Expansion could mean more capital expenditure eating into profits. The company has been cutting prices. That could hurt profit margins but still may not be enough to defend it from growing competition as other carmakers catch up with Tesla’s head start in electric vehicles.
If profit growth stalls, or earnings fall, today’s valuation could come to be seen as expensive.
My move on Tesla
I am more tempted to add the firm to my portfolio than I have been for a while, even after its 2023 share price jump.
The business model is now proving itself at scale. That could continue, driving both revenues and profits.
However, I am still put off by the risks. Competition is growing rapidly. To merit its current valuation, let alone a higher one, I think Tesla needs to keep delivering very strong business growth. That is a difficult feat to manage year after year.
It might happen. But I am more comfortable with the balance of risks and rewards elsewhere in the stock market at present, so I will not be buying Tesla shares.
