Is the Tesla share price good value?

The Tesla share price seems very high to me based purely on fundamentals. Here’s why some investors still think that it represents good value.

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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.

Risky business

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.

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Charles Archer owns shares of Tesla. The Motley Fool UK owns shares of and 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.

The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

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