Being a shareholder in Tesla (NASDAQ: TSLA) has always been a dramatic ride. It has been very rewarding for many investors though. Over the past five years, Tesla stock has soared 462%.
Lately though, things have not been going so well. In fact, Tesla stock has crashed 45% from where it stood in the middle of December. That is a long way to fall in a fairly short time, especially for an enterprise of this size. Even after the crash, Tesla has a market capitalisation of $826bn.
So does this put Tesla on a firmer footing when it comes to valuation – or could things get even worse from here?
Brilliant business with a proven track record
For me, this is not purely an academic question. I am not a shareholder at the moment. But I do think Tesla has a lot going for it as a business. If I could invest at what I thought was a reasonable price I would happily do so (in this regard, I follow Warren Buffett’s maxim of aiming to buy into great companies at attractive prices).
The market for electric vehicles (EVs) is huge and set to grow over time. Tesla is one of a limited number of players who have proven that they can scale up to a mass-market sales levels – and make money doing so. Its installed base, well-known brand and proprietary technology all makes it attractive to me. Its vertically-integrated production and sales approach also helps set it apart from rivals, in my view.
Not only that, but its power generation business is already significant and growing fast. Meanwhile, there remains significant untapped potential in fields Tesla is hoping to crack, including self-driving taxis and robots.
The price could keep falling
Clearly though, something has happened. Tesla stock did not plummet 45% in a matter of months for no reason. The obvious ones include last year seeing the first ever fall in sales (albeit a small one) and investor concerns that Tesla boss Elon Musk’s high-profile public role may tarnish the brand for some potential customers.
On top of that, the EV market is becoming more competitive as Chinese rivals like BYD (a long-term Buffett holding) make inroads in markets where Tesla has done well. Tax credits in markets including the US are also at risk, which could hurt profitability for the carmaker.
Are such risks priced in after Tesla stock crashed? I do not think so. In fact, Tesla stock trades on a price-to-earnings (P/E) ratio of 130.
If some of the risks I mentioned come to pass and earnings fall, the prospective P/E ratio could be even higher. But just taking the current 130 figure, it is far more than I would be willing to pay for the share.
I see real value in Tesla, so I do not think the share is driving to zero. However, I still see it as significantly overvalued and think it could sink a lot more even from its current level. For now, I will not buy.
