The Tesla (NASDAQ: TSLA) share price fell by 6% to $1,000 on Thursday, on the day that CEO Elon Musk sold another $1bn of Tesla stock to meet tax obligations.
Mr Musk’s disposals have now totalled nearly $12bn in five weeks. But the electric car boss still owns around $165bn of Tesla shares, according to my estimates. I’m not worried about his commitment to the business. Indeed, with the shares down by around 20% from their October peak, I’m wondering whether I should be buying Tesla stock.
A world-changing business
Tesla attracts some strong views in the market, not all of them positive. However, I’m not here to bash the company or pick holes in its accounting.
I think there are probably still some rough edges to this business. And I’m a little sceptical about Tesla’s self-driving claims. But overall, I think that what Elon Musk has achieved is very impressive. In my view, it’s probably fair to say that Tesla cars have had a global impact in terms of speeding up the transition to electric vehicles.
In 2016, Tesla produced 84,000 cars. Over the 12 months to 30 September, the company built 804,339 cars. At the same time, the business has become much more profitable. Further expansion is underway, with new factories being built in both Europe and the US.
Here’s what worries me
Back in 2000, internet boom was in full swing. Companies such as Cisco Systems were playing a similar role to EV companies like Tesla today. Cisco was shaking up the markets with game-changing technology. Established competitors (including the company I worked for) were trying desperately to catch up.
While some dotcom businesses have since disappeared, Cisco has been very successful. The network equipment manufacturer’s sales have risen from $19bn in 2000 to $50bn today. Annual profits have risen from $2.7bn to $11bn over the same period.
The only problem is that Cisco’s share price today is still lower than it was when prices peaked in March 2000. Investors who bought near the top and decided to hold onto their Cisco stock have spent 20 years waiting to get back to breakeven. I think there’s a risk something similar could happen to Tesla shares.
Will I buy Tesla stock?
I expect Tesla’s sales to continue rising as demand for EVs increases. I also think that Tesla’s profitability should continue to improve. City forecasts suggest profit margins could rise over 10% next year.
However, Tesla’s share price has risen by 1,500% over the last two years. The company’s revenue has only risen by 100% over this period.
Broker forecasts now show Tesla shares trading on 130 times 2022 forecast earnings. That’s based on earnings growth of 35% in 2022.
In my view, this valuation is probably already pricing in around five more years of strong growth. Although it’s possible that Tesla’s profits will grow much faster than anyone expects — justifying a higher valuation — I think it’s unlikely. It’s certainly not something I’d stake my own cash on.
I suspect that conventional car manufacturers will become much tougher competitors for Tesla over the next few years. Although I admire Tesla’s achievements, I don’t think the stock’s valuation is justified by fundamentals. For this reason, I won’t be buying the shares today.
