Down 16% in a month, is Tesla stock a falling knife?

I did not buy shares in Tesla (NASDAQ: TSLA) a month ago. So far, that looks like the right decision as Tesla stock has tumbled 16% over that period.

Still, as a long-term investor, I do not typically think about owning shares for a matter of weeks.

I reckon the real money is made over the long term. Indeed, as Warren Buffett’s former partner Charlie Munger once said, “the big money is not in the buying and the selling but in the waiting”.

Tesla stock actually demonstrates that point, over the long run.

Even after the past month’s fall, it is still up 490% over the past five years.

So, I have been considering whether the recent share price tumble could be a buying opportunity for me.

I do like many things about the company – but am concerned that, at its current price, it could still be a falling knife.

Tesla has a lot of unique strengths

This, for me, is a question of price.

I think there is a lot of substantial value in Tesla. The thing is, if I buy it at too high a price, and the price later falls, I could end up losing rather than making money with my investment.

Focusing on the underlying business, why do I like the Tesla investment case?

Electric vehicle adoption continues to grow and I expect that will remain the long-term trend. Tesla has a proven production and sales capability at scale. It has a strong brand, distinctive models like the Cybertruck, and lots of proprietary technology.

That could help the existing car business grow in coming years. It also positions Tesla well as it seeks to expand into new vehicle-related opportunities such as self-driving taxis.

On top of that, vehicles are not the only driver for Tesla’s success.

It has a large power generation business that has been going gangbusters. I reckon the future growth opportunity there remains huge.

I’m concerned this could be a falling knife

Indeed, Tesla made net income of $7bn last year.

That is a lot of money. Still, it is less than half of the prior year’s net income. As Tesla’s car volumes declined for the first time, company revenue grew just 1%.

For a growth share, revenue increasing 1% year on year does not impress me. While the $7bn net income is a lot of money, it pales next to Tesla’s capitalisation on the stock market: $1.1trn.

That means the Tesla stock price-to-earnings ratio is 174.

For any company, that would strike me as very high. But this is a company that saw little revenue growth last year and sharply lower profits.

Competitive threats from other carmakers have grown, and increased pricing pressure could mean Tesla needs to cut prices further (hurting profits) or settle for lower sales volumes (hurting revenues).

I think the business is excellent, but the valuation simply looks unjustifiable to me. I think it could end up falling a lot more from here.

If it goes down enough, it might even reach a point where I am happy to buy – but that is still a long way down.

So, for now at least, I will not be buying any Tesla stock.