The past few months have been incredible for shareholders in electric vehicle maker Tesla (NASDAQ: TSLA). Tesla shares are now worth 98% more than they were in October. While that is remarkable growth – especially given the scale of the company – over five years things have been even better. Tesla stock has risen 1,026% during that period.
But despite the meteoric ascent of the past few months, is there anything left in the tank that might push the share price even higher?
Great company with a proven business model
I think there are multiple reasons to like Tesla.
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A few years ago, it was a lossmaking company still trying to establish that there was a viable market for electric cars in general and its models in particular.
Fast forward to today and how things have changed.
Tesla shifts tens of thousands of cars each week on average. It has a powerful, well-known brand and a well-oiled manufacturing network. The carmaker has millions of existing customers and continues to develop proprietary technology that could help it open up new revenue streams, such as self-driving taxis.
Not only that, but Tesla is more than just a car company. It has proven its ability to use its battery expertise to install power storage solutions at scale. That is already a big business for the company — and looks set to keep growing at a fast clip.
The market is changing around Tesla
All of that said, I do see some risks for the firm.
A key one is the rise of sophisticated competitors that have their own proprietary technology. NIO has an interesting battery swapping service, but the company’s business model remains unproven, in my view.
By contrast, BYD (in which Warren Buffett is a long-term investor) substantially outsold Tesla last year in terms of vehicle numbers.
As the electric vehicle market has matured, Tesla’s distinctiveness has been harder to maintain – and so has its pricing. I see further competition as a risk to profit margins at Tesla.
The valuation leaves no margin for error
In itself, that is not necessarily a bad thing. It proves the market for electric vehicles is here to stay. Some competition can help keep Tesla on its feet.
As an investor, though, it does affect my take on the shares. While I like the business, I do not like the current valuation.
A price-to-earnings ratio of 116 means that if an investor took over the company at today’s valuation using an interest-free loan it would take more than a century’s worth of earnings just to repay the purchase price.
That seems far too high to me. Tesla’s earnings face risks including the ones I mentioned above. I do not think the current valuation provides any margin of safety at all for me as an investor.
Sure, momentum and investor enthusiasm might push the shares higher in the short term.
As a rational long-term investor, however, I do not think the current outlook for the company merits the price tag. I have no plans to buy Tesla shares for my portfolio at the current price.
