Over the past five years, Tesla (NASDAQ: TSLA) has been an incredible share to own, increasing in value by 1,505%. But even over the past month alone, Tesla stock has soared 50%.
That means that if I had invested £10,000 in Tesla in the first half of June, I would already be sitting on a holding worth around £15,000.
What has driven this sudden price surge – and ought I to join the ride ahead of the latest quarterly production and sales numbers, due out this month?
Investors are out in force
In short, the Tesla stock price has gone up for a simple reason. Lots of people want to buy it! There has not been any large-scale news about the fundamentals of the business performance over the past month that I think could justify the surge in price we have seen.
The last significant news was the release of a first-quarter update in April. The shares fell 15% in the several weeks following those numbers, suggesting the market was underwhelmed by them. No wonder. Revenues fell 9% year on year, while automotive revenues were down 13%. The gap is explained by growth in the energy storage and services arms of the carmaker.
Net income attributable to common stockholders more than halved. Positive free cash flow in the same quarter last year was replaced by a negative free cash flow of $2.5bn this time around.
Valuing the potential
Still, am I missing something?
A 50% rally does not typically come out of nowhere. Tesla is not some minnow in a neglected corner of the stock market, but a closely watched business with a market capitalisation north of $800bn.
My theory is that investors are going back to the fundamentals of the investment case for Tesla stock. Strong growth in services revenue shows the potential for Tesla to make that a critical profit generator for its business, as Apple and others have done.
Growth in energy storage underlines the progress Tesla is making in that field. It has sizeable competitive advantages in energy and can benefit from rising customer demand.
Meanwhile, a decline in automotive revenues and deliveries can be explained away by the increasingly fierce competition in the electric vehicle market. That is inflicting pain now, in terms of lower pricing and lower profit margins. It may also explain the lower volumes. But if it forces weaker players to exit the market at some point, it could ultimately benefit those left standing.
Not the right value on offer for me
Still, as a long-term investor, not a trader, the current price tag the stock does not look like a bargain to me.
I think it has a wide array of competitive advantages, from its proprietary technology to a large installed used base. But so far, business this year has been challenging and I think that could continue for some time yet.
A price-to-earnings ratio of 67 does not properly reflect those risks, I feel. So I will not be adding Tesla to my portfolio.
