Yet again, Tesla (NASDAQ: TSLA) shares have continued to defy naysayers, rising an astronomical 135% this year.
This huge jump reverses the fall the shares experienced in 2022, where they lost 65% of their value. Considering this, along with Tesla’s position as the world’s leading electric vehicle (EV) manufacturer, should I be taking the stock more seriously? Let’s investigate.
My thoughts on valuation
I have always been critical of Tesla’s lofty valuation. Currently trading on a price-to-earnings (P/E) ratio of 81.7, the stock is miles above the NASDAQ average. The NASDAQ in itself is comprised of pretty lofty valuations and is considered an index in which ‘high growth’ stocks tend to list. When I look for good-value stocks, I tend to aim for a P/E ratio of below 10.
Using a simple approach, I can predict the future growth of Tesla’s share price. On a last 12-month basis, the EV manufacturer delivered an earnings per share (EPS) of $3.09. Analyst estimates have this figure forecasted to rise to the $4 mark for FY23.
The NASDAQ average P/E ratio currently sits at 25. Technology front-runner Nvidia – another NASDAQ superstar, similarly criticised for its high valuation – trades on a P/E ratio of 64. Splitting these down the middle, I would be willing to give the stock a forecast earnings multiple of 45. This is pretty much what Chinese competitor Li Auto currently trades at.
Taking my estimate, coupled with the EPS forecast, yields a share price target of $180. This marks a 28% fall from the current share price of $250. Institutional analysts seem to share this pessimism, with HSBC recently slashing its target price to $146.
Now these are just hypotheticals. However, I also see some real risks for Tesla shares. Firstly, persistently high inflation across the globe has no doubt impacted consumer spending habits on items such as luxury EVs. Also, competition in the space has heated up massively in the last few years, with established players such as Ford and General Motors committing billions to an EV overhaul.
Long term potential
That being said, from a long-term perspective, I still think there is a lot to be excited about.
Countries across the world have committed to carbon neutrality in the coming decades. One of the easiest ways to do this is by switching to EVs. There are already plans in place to scrap the sale of combustion engine cars in coming years – although the UK recently delayed these by five years.
As the market leader, Tesla is primed to capitalise on this opportunity, and I expect the future share price to reflect this.
So, am I missing out?
As a long-term investment, I think the Tesla investment case makes a lot of sense. At today’s price however, I am not convinced. Simple maths, coupled with institutional research, signifies the price could drop significantly. I also see numerous other short-term risks for the business. As such, I won’t be buying any shares today.
