I’ve never owned Tesla (NASDAQ:TSLA) shares. I intended to buy back in December, but I was too slow to act.
So how about now? Tesla shares are trading way above where they were at Christmas, but they’re down around 15% since peaking in February.
Could this be an excellent opportunity for investors? Let’s explore.
My concerns
Let’s start by looking at my concerns about Tesla.
Firstly, it has a huge valuation, worth around $550bn, making it one of the largest companies in the world. It trades with a trailing 12-month price-to-earnings (P/E) ratio of 49. And its price-to-sales ratio (6.1) is some way above traditional car manufacturers and Chinese peers.
In fact Porsche, which has a particularly impressive offer the electric vehicle (EV) sector — the Taycan — trades at just 3.3 times earnings. Investor Cathie Wood often says “Tesla is in pole position to dominate“, but trades at one hell of a premium. Plus, I think they’re going to find some pretty stiff competition from traditional combustion engine manufacturers.
Moreover, the Elon Musk company is currently looking to expand its market share at the expense of its margins. In Q1, revenue came in at $2.5bn, down from the $3.7bn it made in the last quarter of last year, and the $3.3bn earned in the first quarter of 2022. Tesla’s operating margin was just 11.4% in the first quarter, down from 19.2% a year ago.
So Tesla is expensive and its margins are falling. That’s not a great sign.
So what’s the upside?
Well, it’s the only profit-making EV company, perhaps with the exception of Li Auto. Its margins were the envy of the industry and, of course, there’s a capacity to increase prices over time.
Tesla’s growth has continued unabated in recent years, despite a challenging macroeconomic backdrop. And the Biden administration’s new stimulus package is likely to help boost demand moving forward.
Tesla hopes to achieve compound average growth of 50% over multiple years. In 2023, it’s on track to make at least 1.8m vehicles. That’s truly massive.
But looking beyond this, self-drive vehicles may unlocked greater value. Musk recently said he believed the company would achieve full self-driving capability this year.
Musk plans to sell these autonomous vehicles but also deploy them as part of a network of taxis, thus creating a new revenue stream.
However, there’s no guarantee Tesla will pull this off in the near future. Musk also has a history of overpromising and underdelivering. In the past, his bullish narrative could have sent the share price soaring, but nowadays I think his word counts for less.
Still pondering
I can’t quite decide whether Tesla is right for me. It’s very expensive, but there’s definitely something in self-driving vehicles. Yet I anticipate the path to turning these vehicles into saleable products, or revenue-generating taxis, will be fraught with challenges.
