Over the years, owning Tesla (NASDAQ: TSLA) has been the stuff of dreams for some investors. Tesla stock has soared 854% in the past five years.
Lately, things have not been so rewarding. The shares have lost 27% of their value so far this year.
With ongoing sales growth expected for the tech pioneer, could this be a buying opportunity for my portfolio?
Growing industry, tougher competition
A key reason some investors have cooled on Tesla is growing competition in the electric vehicle industry.
But is this necessarily a bad thing for the company?
In some ways, I actually see it as a positive. It shows that greater numbers of drivers and fleet managers are buying electric vehicles. In the long term, that ought to be good for demand.
It could help make them more appealing in turn, thanks to more widespread charging networks and better availability of things like insurance and specialised garages. A bigger industry could also bring economies of scale for manufacturers
Of course, there may well be downsides too.
More competition can mean price pressure, leading to smaller profit margins. We have already seen some evidence of this at Tesla.
If total market supply grows faster than demand, it could also hurt sales growth. Tesla’s automotive revenues in its most recent quarter only grew 1% year on year, well below the company’s historical rate.
Is now the moment to buy Tesla
In the long run though, I expect the field of producers to narrow as the huge costs of car production send some to the wall.
Tesla has a number of competitive advantages, including its strong brand, a large customer base, proprietary technology and a sizeable lead in scaling production compared to newer market entrants.
I therefore think that, despite the risks, it ought to do well as a business further down the line.
Does that mean that it merits its current valuation, though?
Even after its recent weak performance, Tesla trades on a price-to-earnings ratio of 42.
That is a more attractive valuation than has typically been the case in recent years. But it still looks pricey to me. I certainly do not see it as a bargain.
Yes, Tesla is a proven business. Yes, it has appealing future prospects. But it is operating in a challenging commercial environment. The risks I discussed above are significant ones.
Wait and see
So what do I plan to do? For now, nothing.
I will not be buying Tesla stock any time soon. But as I like the company, I am keeping it on my watchlist. If the share price falls to a price where the valuation looks sufficiently attractive to me, I would then consider adding the carmaker to my portfolio.
That could also happen if earnings growth outstrips share price growth.
