Being a shareholder in carmaker Tesla (NASDAQ: NYSE) can look a lot like being on a roller coaster. On one hand, Tesla stock has crashed 41% since mid-December. On the other hand, even after that slump, it is still worth 32% more than it was as recently as October.
Over five years, Tesla stock is up 533%. I would be thrilled if my portfolio did even half as well as that!
So, might Tesla still be overvalued after its recent tumble? Or could this be a buying opportunity for my portfolio?
Here’s what great investors often get right
Tesla is a classic example of a momentum stock. It can move up and down – sometimes substantially – for reasons other than the fundamental performance of its business.
It is also a company that frequently makes headlines.
That can seem bad, as right now when weakening sales volumes in some European markets hit the news. But the headline-grabbing nature of the company is also what has helped propel it from just an idea to a firm with a market capitalisation of $883bn in just 22 years.
Throughout history, hugely successful investors like Ben Graham, Warren Buffett, and Peter Lynch have all had one thing in common.
They could step back from the day-to-day noise and focus on a long-term investing approach that considers whether a company’s current valuation accurately reflects how much it is likely to be worth years down the line.
Tesla’s potential is starting to collide with reality
So, what does that mean for the valuation of Tesla?
It can help to think of the company as a collection of discrete businesses under one umbrella.
Primary among these is the vehicle maker. Sales volumes last year fell slightly and a crowded marketplace is pushing down selling prices and profit margins across the industry.
But Tesla does have strengths in the motor trade: economies of scale, a proven vertically integrated business model, powerful brand, and large installed user base.
Next is the power generation business. This is growing fast in a market with high long-term demand. Tesla has expertise in battery storage that can help.
Here, though, I see less of a long-term unique competitive advantage than in cars. Still, it could be a solidly profitable business in future just like many well-established power providers.
What else?
Robots? For now I see this as an idea more than a business. Whether Tesla has a sustainable competitive advantage here remains to be seen.
Self-driving taxis? Again, this is somewhere between the drawing board and real world commercialisation. It could boost Tesla car sales substantially. But this is also a space where multiple sophisticated and deep-pocketed rivals including Waymo parent Alphabet are jostling for space.
On balance, Tesla surely has bucketloads of potential. But it is operating in a challenging and fast-moving environment, across multiple markets.
I still won’t touch the share at this price
Tesla stock sells for 138 times last year’s earnings.
That still looks very overvalued to me. Does the long-term potential of the above collection of business justify it, when considering the risks as well as the potential?
I do not think so.
At the right price I would snap up Tesla stock in a heartbeat. But it is still too costly for my tastes.
