Tesla (NASDAQ:TSLA) must surely rank among the most divisive growth stocks ever. And after surging 101% in 2023, its valuation has come into sharp focus again.
The bears view Tesla as a grossly overvalued auto manufacturer whereas some bulls see the shares heading much higher. Meanwhile, the stock is down 30% over two years but up about 1,000% in five years.
What’s going on here?
A remarkable achievement
In 2010, Tesla became the first US car company to go public since Ford in 1956. But CEO Elon Musk has revealed that just one year earlier the late Charlie Munger listed several reasons to him why he believed the electric vehicle (EV) firm would fail.
Yet despite the high likelihood of failure, it has triumphed. And last year its Model Y became the world’s bestselling car, overtaking the Toyota Corolla even though it costs about twice as much.
To go from a start-up with one product to the world’s most valuable auto maker in less than 15 years is truly remarkable. Even Munger later said: “What Tesla has done in the car business is a minor miracle“,
So Tesla is undoubtedly a great company. But is the stock overpriced?
Valuation
The shares currently trade at 69 times expected earnings for 2023. That drops to 55 times for this year’s forecast earnings.
That’s a mighty premium to the wider S&P 500 (21). And if this were a value stock then it would certainly be horribly mispriced. But Tesla is a quality growth stock and these rarely trade at average market multiples.
Moreover, the firm sold 1.8m vehicles last year, despite the dodgy state of the global economy. That was up from less than 500,000 vehicles in 2020. So it is growing much quicker than the overall auto market, arguably justifying its premium.
Admittedly, the stock was ridiculously overvalued in late 2020 when it was trading at preposterous levels. But back then its Shanghai factory had just begun production and the gigafactories in Texas and Berlin weren’t even built.
Therefore, I think the stock is less risky today, though there are challenges.
Rising competition
Musk predicted that Tesla’s biggest competitive threat would come from Chinese EV firms, not legacy Western carmakers.
This was correct, as Chinese rival BYD has just overtaken Tesla as the world’s top-selling EV firm.
I think Chinese competition is a risk, as is China itself. New regulations may emerge, especially around data, which Tesla collects a lot of, and that could hinder operations and growth there.
My Foolish takeaway
If I’m after a cheap stock on a low valuation with a juicy 5.1% dividend yield, then Ford could be what I’m looking for.
If I want to invest in fast-growing industries (EVs and solar energy) and potential future ones (robots and robo-taxis), then Tesla certainly fits the bill.
For different reasons, I think both stocks could add value to a balanced portfolio, despite the challenging global economy.
But given Tesla’s $754bn market cap, I don’t expect the stock to double again this year. And Musk has been tempering growth expectations lately, saying the days of annual 50%+ growth are probably over. He still expects rapid growth, though.
If I didn’t already own Tesla shares, I’d consider investing today, but I wouldn’t bet the farm.
