Since the turn of the year, the Tesla (NASDAQ:TSLA) share price has fallen 23.9%. One reason for this was Tesla’s earnings miss. The Elon Musk-owned company, which has traded for a long time on growth expectations, has struggled to deliver in recent months.
But even after falling 23.9% since the beginning of the year, the stock still trades at 64 times last year’s earnings and 64 times forward earnings. So surely the only way is down for Tesla?
The plus side
While there may have been question marks in the past, nowadays Tesla has a good quality and price competitive option. In fact, I’m looking at leasing a Tesla. So it’s always positive when you like or believe in the product.
And this improving and competitive product offer has translated into a commanding share of the market. Tesla was top of the leaderboard in 2023, with a 19.1% share of the global battery electric vehicle (BEV) market. That’s a gain from the 18.2% share of 2022, but far from the 23% it had at the end of 2020.
I also recognise Tesla’s position as a disruptive technology player and that it’s likely to be at the forefront on the next step-change in transportation. Musk’s company has made impressive strides in the use of automation and one day plans to create a new revenue stream through its creation of a driverless taxi fleet.
It’s not plain sailing
Investors may get carried away by Musk’s vision for the company. The issue is that self-driving cars and a fleet of self-driving taxis are unlikely to contribute positively to net earnings over the next five years. And this is a real challenge, as investors need to invest in things that are, to some extent, predictable.
In the near term, Tesla appears to be focusing on maintaining or gaining market share by pushing prices down in an increasingly competitive market. Once the first-to-market king, Tesla is by no means the only electric offer nowadays. As such, margins have suffered.
It’s hard to see how this is going to change in the coming years. We may see some EV manufacturers, like NIO, go out of business due to Tesla’s pricing pressure and competition. But other companies are here to stay.
Premium valuation
Tesla is one of the most expensive stocks on the market, trading at an incredible 64 times earnings. For context, that’s almost twice as expensive as Nvidia, a company that is truly central the artificial intelligence (AI) revolution.
Moving forward, Tesla’s expected price-to-earnings ratio falls to 42.8 times in 2025, 35 times in 2026, and 29.8 times in 2027. Even at the end of the medium term, it’s still looking quite expensive. This is indicated by the price-to-earnings-to-growth ratio of 3.96.
Personally, I’m not investing in Tesla with the current valuation in mind. In fact, I really can’t see any reason why the stock would push upwards from here. It’s a great company, but vastly too expensive for me.
