Tesla: not profitable enough to justify its share price

With the company producing 46,000 more cars than it is selling, Stephen Wright thinks the Tesla share price is too high, even after a 32% decline.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Apple. The Motley Fool UK has recommended Apple, Diageo Plc, Nike, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »