The Tesla (NASDAQ:TSLA) share price has fallen by around 32% since the start of the year. Despite this, I think a look at the company’s fundamentals indicates that it’s still overpriced.
Obviously, Tesla’s financial performance today is a long way from where investors expect it to be in the future. But even so, the falling share price still doesn’t look like a buying opportunity to me.
Growth and valuation
Ultimately, the investment equation for any stock comes down to two things. One is how much cash the company is going to produce and the other is how much the shares cost to buy.
Other things being equal, that means the share price coming down makes a stock more attractive to investors. And Tesla is no exception – the stock is clearly better value at $168 than it was at $248.
At today’s prices, the company has a market cap of $528bn. That means an investor looking for a 6% annual return should be expecting the company to generate just under $32bn per year in free cash.
Tesla managed just under $4.5bn last year, so averaging $32bn per year over the next decade implies annual growth of around 45%. That’s a lot – and it makes me think the share price is unjustified.
Inventory issues
In fairness, 2023 was an unusually difficult year for Tesla – weaker-than-expected demand caused the business to cut its prices, resulting in lower margins. But now there’s another problem.
According to the firm’s delivery report for the first three quarters of 2024, the company produced 46,000 more vehicles than it sold. And that’s despite issues at its factories in Berlin and Fremont.
That means Tesla has excess inventory going into the next three months. And this isn’t conducive to the business achieving higher margins by increasing its prices.
For a company that is depending on rapid growth to justify its current share price, I think this is a big concern. The longer the growth takes to materialise, the more overpriced the stock looks.
A growth company with no growth?
I don’t think the investment equation for Tesla looks attractive at the moment. But even I thought that Wells Fargo calling the firm “a growth company with no growth” was a bit much.
Some of the issues the company has been facing have been highly predictable. It operates in a cyclical industry and it’s hardly unique in struggling as consumer spending comes under pressure.
Weak consumer demand – especially in China – has been an issue for a number of businesses, including Apple, Diageo, and Nike. If this turns around, Tesla could be a big beneficiary.
The real question, though, is when the situation is going to improve. Unless it does so soon and in a way that allows the company to clear its excess inventory, the equation doesn’t look good.
Innovation
Tesla’s CEO says it is waiting for the next big growth wave. That’s fine, but unless this materialises soon, I don’t see how the stock is worth the current share price – and it’s not just me.
Innovation runs through the company’s culture, but it’s simply producing more cars than it can sell at the moment. And that’s not conducive to investment returns.
