Is it downhill from here for Tesla stock?

Christopher Ruane takes a look under the Tesla bonnet and discusses why he’d buy the stock at the right price — and whether that’s now.

| More on:

Image source: Tesla

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.

It has been an incredible few months for investors in Tesla (NASDAQ: TSLA). Since October, Tesla stock has doubled (yes, doubled). That is even after taking into account a fall of 11% over the past month, or so.

But with the company’s car sales falling last year for the first time, might the share price now follow?

Tough market getting tougher

In its car business, Tesla has build an incredible operation thanks to a few strengths that include its powerful brand, first mover advantage, proprietary technology and large customer base.

I continue to see those as advantages, though I think the benefit of the company being a first mover in key parts of the electric vehicle (EV) industry is of declining importance.

After years of losses, the company has been profitable for the past few years and earnings per share (EPS) have been moving upwards.

Created using TradingView

Not only have profits been marching upwards, but so too have revenues, in a big way.

Created using TradingView

The growing revenues and profit, plus Tesla’s long-term advantages, help explain why investors have been so enthusiastic about the stock.

But the carmaker is not alone in its field. A host of competitors have emerged and some are serious rivals. BYD, for example, trounced Tesla’s sales numbers last year, shifting more than twice as many cars – and also selling more TVs in Japan than local giant Toyota.

With large, successful competitors vying for customer spend, there is a risk that pricing in the EV sector will go down, making it harder for Tesla’s car division to maintain its profit margins.

More than one iron in the fire

I say ‘car division’ because Tesla is more than just a motor company. It has been applying its expertise in renewable energy to a wider set of challenges, and has a fast-growing energy storage division.

I think that could be a key growth driver and may mean (time will tell) that Tesla ends up being able to report revenue growth last year even though vehicle sales fell.

Over the long term, I think the Tesla investment case has a lot to like. The EV market getting tougher may squeeze profit margins, but it may also thin out the field, helping strong players like Tesla in years to come. Meanwhile I believe energy storage alone could end up being a massive business for the firm.

No plans to buy at this price!

But while I like the investment case, I do not like the current share price. In fact, I think Tesla stock looks wildly overvalued. That does not mean it could not go even higher. Clearly, the stock has a lot of momentum and some investors are wildly enthusiastic about it.

But I think the valuation – 117 times earnings – is too high (by a long shot) to justify on the fundamentals. Sure, it may look look cheap (!) by Tesla’s historical standards.

Created using TradingView

But that in itself does not make the share cheap. Instead, to me, it looks unjustifiably high, based on a realistic assessment of the current business prospects.

So at anything like the current price, I will not be adding Tesla stock to my portfolio.

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.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended 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

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

2 UK shares that could soar if interest rates sprint lower!

The Bank of England's latest meeting has fed speculation of swingeing interest rate cuts. I think these UK shares could…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

My favourite FTSE dividend stock just jumped 17%! So why am I sad?

This investor has mixed feelings today as a quality dividend stock from the FTSE 250 surged higher in his portfolio.…

Read more »

Investing Articles

Here’s why AstraZeneca stock jumped nearly 6% in the FTSE 100 today

FTSE 100 heavyweight AstraZeneca helped propel the blue-chip index to a record high today. Here's what investors were cheering.

Read more »

Closeup of "interest rates" text in a newspaper
Investing Articles

Interest rates fall again! Here are 3 FTSE dividend growth shares to consider buying

As interest on cash savings becomes increasingly less attractive, Paul Summers has been looking at dividend growth shares for passive…

Read more »

Investing Articles

Up 10% today, I think this FTSE 250 growth share could continue to surge!

Babcock International's flying after upgrading its full-year forecasts. I think the FTSE 250 defence share might just be getting started.

Read more »

Investing Articles

The AstraZeneca share price jumps 5% on today’s strong results – but is it too expensive?

Harvey Jones hails the brilliant long-term performance of the AstraZeneca share price, but wonders whether the FTSE 100's biggest company…

Read more »

Investing Articles

Is this my chance to buy Alphabet shares?

A big step up in AI spending at Google has investors nervous, but has it created an opportunity to buy…

Read more »

Senior woman potting plant in garden at home
Investing Articles

£10k in savings? Here’s how an investor could aim for a monthly second income of £1,200

Mark David Hartley considers how investors could build towards an early retirement plan with a second income from a portfolio…

Read more »