Over the Christmas break, one of the stocks that really caught my attention was Tesla (NASDAQ:TSLA). It has fallen by 45% in just the past month, pulling it down 71% over a broader one-year time period.
It is now threatening to slip below $100, a level not seen since the summer of 2020! This makes me wonder if Tesla shares are becoming undervalued.
Vast growth in previous years
Using ‘Tesla’ and ‘undervalued’ in the same sentence isn’t a common occurrence. After all, the hype around the electric vehicle (EV) maker saw the share price jump from $30 at the start of 2020 to $350 at the end of 2021. In the process, the price-to-earnings ratio (P/E) soared to above 200. This was because the earnings were yet to grow in the same manner that the share price was.
This isn’t unusual for growth stocks, as investors try and buy ahead of a company starting to outperform. Usually, it’s the anticipation (or forecasted growth) around the firm that causes people to invest, even if the current financials aren’t that great.
Tesla was a classic case of this, but did show strong growth in car deliveries over the past year. In fact, the latest figures for Q4 showed deliveries of 405,278 vehicles, an all time record. In turn, the previous record was in Q3 2022.
Even with the impressive figures, it was hard for some investors (myself included) to get really excited about buying Tesla shares when it was already trading at such an elevated level. However, this picture has quickly changed!
Sudden drop in Tesla shares
The stock did get caught up in the general poor sentiment last year that flowed through the stock market in general. It hit growth stocks hardest, given that everyone was downgrading forecasts for the economic outlook.
However, most of the losses on Tesla shares have come within the past couple of months. I can see some company specific reasons for this.
One is that even though delivery numbers are increasing, the figures versus the target are being missed. The Q4 numbers were the third straight miss in deliveries, something that clearly isn’t being taken well by investors.
There’s also concern around the focus of Elon Musk, who bought Twitter recently and seems to be spending a lot of time and effort on that platform. This is causing some investors to think he’s dropped the ball when it comes to the leadership and direction of Tesla.
Patiently waiting
When it comes to the numbers, I don’t feel Tesla shares are undervalued quite yet. The P/E ratio is currently 33, comfortably above the Nasdaq 100 average of 23. The Nasdaq 100 is also a fair comparison, given that it comprises most big tech names.
Given the steep fall in the stock in recent days, I don’t see any reason why it’s going to stop right now. Therefore, I’m going to put it on my watchlist. If the steep fall continues, it has the potential to fall into undervalued territory within the next month. At that point, I’ll consider buying.
