In recent years, owning shares in Tesla (NASDAQ: TSLA) has been very rewarding for some investors. Not all though. While Tesla stock has soared over tenfold in the past five years and more than doubled so far this year, it is around 18% below its 52-week high at the moment.
But given its generally positive track record, ought I to buy a bit of Tesla? Having doubled this year, could the shares double again In 2024?
Looking to the future
The first thing to note is that past performance is not necessarily an indicator of what will happen in future when it comes to the stock market.
There are a couple of things that tend to drive share prices. One is what we call the fundamentals. Basically that means business performance. Are sales strong? Is the company turning a profit? And more questions like that.
The second element in share valuation is what we call sentiment. How are investors feeling about a share?
That may sound subjective, but the reality is that even fundamentals are not as objective as they may sound.
Take profitability, for example. In Tesla’s case, growing price competition among electric vehicle manufacturers could lead to lower profits for firms including this one. But the long-term financial impact remains to be seen – and lots of different investors have a variety of views on that topic.
Big growth, questions about profit
When it comes to fundamentals, Tesla is a bit of a mixed bag right now.
The most recent quarter saw a decline in production volumes compared to the prior three-month period. However, the firm said that was down to planned production pauses and maintained its volume target for the year.
That target – 1.8m vehicles— reflects how large the multinational manufacturer has become. As demand for electric vehicles continues to grow, I expect the company’s strong brand, technological prowess and distribution network to continue growing well.
Tesla also has a growing presence in other markets aside from vehicles, such as large-scale power generation in fixed locations. In the last quarter, it deployed 4 GW of energy storage.
However, with ongoing competitive pressure, I see a risk that profit margins will continue to be squeezed.
The latest quarter saw an operating margin of 7.6%. Compare that to the 17.2% achieved in the same period last year and it is clear that squeezed profit margins are already a significant threat to Tesla’s financial performance. I think that could hurt the stock price too.
$700bn+ valuation
That brings us to the issue of valuation.
While Tesla has fallen from its 52-week high, the company still commands a $773bn market capitalisation.
For me to make money next year by buying Tesla now, I would need its valuation to grow. But the company’s existing price-to-earnings ratio of 80 already looks high to me. Given the profit margin challenges, I do not think the business looks cheap at all.
The shares could still rise, for example because of very strong volume growth or signs of a return to higher profitability levels.
However, as I think the valuation already looks high, I have no plans to buy Tesla shares at the moment.
