When I last covered Tesla (NASDAQ: TSLA) shares in late January, I had concerns about the stock’s valuation. Put simply, it was way too high for my liking.
However, recently, Tesla’s share price has fallen significantly. And this has brought the valuation down to a much lower level. Is it time to pull the trigger and buy Tesla shares for my portfolio then? Let’s discuss.
Is Tesla now trading at an attractive valuation?
At present, analysts expect Tesla to generate earnings per share of $12.30 for 2022 and $15.80 for 2023. This means that at the current share price of $770, the forward-looking price-to-earnings (P/E) ratio is 63, falling to 49 using next year’s earnings forecast.
Now that valuation is high on a relative basis. Yet for Tesla, I actually don’t think it’s outrageous. One reason is that the company is still generating very strong growth. Last quarter, for example, total revenue was up 81% year-on-year. For 2022, analysts expect revenue growth of 60%.
And Tesla is now profitable. Last year, it generated a net profit of $5.5bn. Meanwhile, return on capital employed (ROCE) was a healthy 15.4%. To put that number in perspective, Ford had a ROCE of 1.7% in 2022.
Add in the fact that Tesla has a strong brand and that it’s a leader in the autonomous vehicle space, and I think a P/E ratio in the 50s/60s is reasonable.
At that multiple, I am beginning to see some value on offer.
Risks to the downside
I still see some risks here, however. A big one is supply chain and cost challenges.
At present, a lot of electric vehicle (EV) manufacturers are struggling to source lithium for their batteries as demand is greater than supply. Meanwhile, the high level of demand has put a rocket under lithium prices (they’re up nearly 500% over the last year). This has not gone unnoticed by Tesla CEO Elon Musk, who recently tweeted about the “insane levels” of lithium prices.
The problem here is that extracting lithium is a complex process and it takes about 10 years to bring on a new lithium mining project. “There is no shortage of the element itself, as lithium is almost everywhere on Earth, but pace of extraction/refinement is slow,” Musk recently wrote.
So we could see a supply/demand imbalance for a while. This could potentially impact growth and profitability.
A second risk is Musk’s interest in Twitter. If he does buy the social media company (the deal has recently been put on hold), it could potentially be a distraction for the visionary CEO.
Finally, we can’t ignore the competition here. It’s really heating up now. BMW, for example, recently said that it’s focused on a “very strong and fast ramp-up of electric vehicles.” Its EVs include the i4 fastback, which is up against Tesla’s Model 3, and the iX SUV, which targets Tesla’s Model X.
“Tesla had a unique selling point for quite some time. That’s over,” said BMW Group sales chief Pieter Nota recently.
Tesla stock: my move now
Weighing up the risks versus the potential reward here, I’m going to leave Tesla shares on my watchlist for the moment. I do think some value is beginning to emerge. However, right now, I think there are probably safer growth stocks to buy.
