Carmaker Tesla (NASDAQ: TSLA) is known for the quick acceleration of its vehicles. Tesla stock has motored ahead, too, soaring an incredible 890% over the past five years.
Recently, though, it has been falling. So far in 2024, the shares have tumbled 29%.
Here is what I think is going on – and what it means for my approach to owning the shares.
Tough market, proven operator
Tesla has been one of the early success stories in the burgeoning electric vehicle market. It has a lot going for it: a strong brand, installed customer base, proprietary technology and large distribution network.
But while it is a proven vehicle maker and marketer, competition has not been standing still.
Lots of companies are now making and selling electric cars, from pure play rivals like Nio to old school automakers such as GM. That has led to a more difficult pricing environment for firms like Tesla, as some rivals try to attract customers by offering low prices.
There are other challenges in the market that have been weighing on Tesla stock, from increased competition for component supply to logistical difficulties caused by supply chain disruption.
The company has its own, specific challenges too. They include a dispute about executive pay that has sucked up management time that could otherwise have been used in the core business.
Bright future ahead
Despite such concerns – and the risks they may pose to profits — I think the future continues to look promising for Tesla.
Its business is about more than just vehicles. I believe it can benefit from ongoing opportunities in areas like large scale power storage, for example.
The core vehicle business has seen volumes soar in recent years. An expanding manufacturing base could help the firm sell more and more cars in coming years. Vehicle deliveries last year were 38% higher than in the previous year.
Meanwhile, expanded competition reflects the fact that demand for electric vehicles has been growing strongly. I expect that pattern to continue, which I see as good news for a well-established player like Tesla.
Overvalued – or undervalued?
While some of its rivals continue to bleed red ink, Tesla is firmly profitable.
Last year, its net income was around $15bn. That means that Tesla stock currently trades on a price-to-earnings (P/E) ratio of around 40.
That is lower than it has been at many points in recent years. But is it cheap?
I would say no. After all, there are multiple risks that could hurt earnings and a P/E ratio of 40 might not fully reflect them, in my view.
Then again, the company’s growth could lead to higher earnings. So the prospective P/E ratio may be much less than 40.
While the value on offer is not yet attractive enough for me to add Tesla to my portfolio, it is getting closer than it has been for a while.
Indeed, I am keeping an eye on the Tesla stock valuation and the firm’s financial performance. If things continue to improve, I might revisit my decision not to buy the shares .
