A few times during the past year I’ve looked at Tesla (NASDAQ: TSLA) and its eye-watering valuation. But I thought the peak must have been reached when I heard even YouTubers (whose channels are nothing to do with investing) telling us they’d bought Tesla shares.
The Tesla share price has fallen heavily now, though still up 1% over the past 12 months. Today it’s on a price-to-earnings (P/E) ratio of only around 90. In the past it’s been way up in the hundreds.
I do think Tesla stock was overvalued. In fact, I think the same about a number of the technology stocks that make up the Nasdaq index. But we’ve seen a major technology sell-off in the US as investors have been fleeing for safety.
US Bear markets
The NASDAQ and the S&P 500 are officially in bear market territory now, which means falling at least 20% from their peaks. In fact, the Nasdaq is down closer to 30% since its high in late 2021.
I can’t help thinking this could be a great time to load up on American tech stocks at relatively modest prices.
So is Tesla among them, and is it a great time to buy now?
Firstly, now that I’ve asked whether a Nasdaq fall makes it a good time to buy Tesla shares, I want to clarify something. In my view, it’s not a market fall in itself that makes a stock good or poor value. No, it’s got nothing to do with the shape of the chart itself.
Value, not price
It’s all about the valuation of my chosen stock at the time I examine it. Whether the price has climbed to get there, or fallen to get there, doesn’t matter. I know it’s a fall that’s made the Tesla share price what it is today, but I still think it’s an important distinction — it’s not the price that matters, it’s the valuation.
On the face of it, today’s valuation does still look high. But forecasts suggest the P/E could drop to around 35 by 2024. With the potential size of Tesla’s eventual market, I could well believe it would continue to fall after that. That suggests it might be a good buy now.
Yet I have little confidence in my ability to evaluate Tesla shares objectively. So on that alone, I should stay out.
On the other hand, while I believe a Nasdaq correction was overdue, I think it’s probably a bit overdone now. And it could be a good time to buy into US tech stocks generally.
To that end, Scottish Mortgage Investment Trust is high on my list of buy candidates. The trust invests in a lot of these fallen Nasdaq stocks, including Tesla. And while its shares have fallen along with the index, they’re also now at a 15% discount to net asset value.
That might just be the way for me to go, on the grounds that I think such stocks are now generally undervalued, while I’m too uncertain about any specific ones.