Down 45%, could Tesla stock completely crumble?

Tesla stock’s almost halved in under three months. Our writer discusses some of the reasons why — and what he plans to do now.

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Two employees sat at desk welcoming customer to a Tesla car showroom

Image source: Tesla

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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.

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So does this put Tesla on a firmer footing when it comes to valuation – or could things get even worse from here?

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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.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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