Over the past decade, some investors have made a lot of money owning shares in Tesla (NASDAQ: TSLA). In the past five years alone, Tesla stock has moved up by 567%, meaning it now has a market capitalisation of $1.1trn.
However, Tesla stock has slumped by a quarter since the middle of December. Could this be a sign the investment case is becoming less attractive – or a potential contrarian buying opportunity for my portfolio?
Business performance and prospects drive share prices
Shares often move around and that is typically down to one of two things – momentum and fundamentals.
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Momentum is when a share moves because lots of people are buying or selling it, even if the business performance has not changed in a way that merits a new valuation.
That can have a big effect on share prices, sometimes for years. Tesla stock has certainly seen a lot of momentum in recent years, with some speculators piling in just because they expect it to keep going up, rather than because they saw the share as good value for what they paid.
Momentum can work both ways of course, and I think we have seen some of that lately. In any case, I am an investor not a speculator, and momentum does not strike me as a sound basis for long-term investment.
Rather, I prefer to buy (or sell) based on what are called fundamentals — how well a business is expected to do in financial terms.
Tesla’s a great, proven business
Given the recent share price tumble, it can be hard to forget that Tesla is a genuinely great, successful business.
It has been a mass market pioneer in electric vehicles (EVs) and has a strong market share. It has developed a vertically integrated manufacturing and sales operation that has helped it scale up sales quickly. The company now sells thousands of vehicles each day globally.
The expertise Tesla has developed in batteries is helping it ramp up its already sizeable power generation business. Meanwhile, a large customer base, strong brand and proprietary technology could all help it keep doing well in the EV business.
Unlike many sector makers, Tesla is already solidly profitable. However, its vehicle sales did fall slightly last year.
Combined with growing rivalry in that space, I see a risk that revenues could decline and profit margins may also be eroded due to more price competition.
Nonetheless, if I could buy Tesla stock at the right price, I would.
So are Tesla sharers overvalued after the fall? There’s the rub… despite the recent share price crash, the share still sells on a price-to-earnings ratio of 175.
That looks far too expensive to me, even if ignoring the prospect that price competition and reduced tax rebates could lead to Tesla’s earnings falling in years to come.
As an investor not a speculator, I will not be touching Tesla stock at its current price.
