As a firm believer in the EV revolution, the Tesla (NASDAQ: TSLA) share price matters to me. UK PM Boris Johnson has ambitions for all cars bought in the UK from 2035 to be fully electric. Meanwhile US President Joe Biden expects 50% of US cars to be electric by the same year. Last week, he stated that the future of the car industry is “electric and there is no going back.”
It seems likely to me that US-based Tesla will benefit from future federal financial support. But does the current Tesla share price represent good value?
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Tesla share price
At $707, Tesla’s share price is a whopping 1,373% higher than its price of $48 in August 2019. However, this is still a near $200 drop from its $900 high in January this year. With a price-to-earnings ratio of 370, this stock can seem significantly inflated by investor expectations.
However, this valuation could be explained by the leadership of Tesla’s visionary CEO Elon Musk. Many shareholders believe his unique expertise justifies the high Tesla share price.
His first real success was as co-founder of PayPal, the payments firm which now has a market cap of $325bn. Musk could replicate this success, or Tesla could be eclipsed by its competitors. I think the stratospheric Tesla share price can be explained through sentiment. As long as enough investors believe in Musk’s vision, it could remain high.
The business itself is doing well. In its Q2 earnings report, it reported sales of 201,250 cars, against 90,650 in Q2 2020. If it maintains that trajectory, the Tesla share price could look cheap in the near future. For those concerned about its lithium battery use, it has developed the technology to recycle 92% of the lithium batteries used in its cars.
Musk has been in regular Twitter trouble with the US Securities and Exchange Commission regulator.
In 2018, he came under fire for tweeting that he was considering taking Tesla private. He was charged with fraud, fined $20m, and had to give up the chairmanship of Tesla for three years. He also agreed to have Tesla lawyers approve company-related tweets in the future. In May 2020, he claimed the Tesla stock price was too high, bringing himself right back into the SEC’s crosshairs.
He faces a lawsuit from shareholders who claim he used his 22% controlling shareholding power to strong-arm Tesla’s board into buying his cousins’ failing company SolarCity. It has since come out that he had over $500m invested into the company. In court last month, he stated “I tried very hard not to be the CEO of Tesla, but I have to or frankly Tesla is going to die.” If he chooses or is forced to depart the company, it could dramatically hurt the Tesla share price.
Electric vehicles only comprise 2% of cars in the US. Former President Donald Trump rolled back on clean car standards; a future Republican president could easily weaken the EV revolution
Competitor Ford has ambitions for 40% of sales to be electric by 2030. It’s unveiled an electric version of its F-150 model, the most popular US vehicle since the 1980s. Tesla will soon face increased competition for market share.
With $22.5bn of shorts betting against the company, it’s the most heavily shorted stock in the US right now. I think that on balance the Tesla share price is not good value for me.