Long-term shareholders in electric vehicle maker Tesla (NASDAQ: TSLA) are used to turbulence. With a 693% gain over the past five years alone, many of them probably do not care. But recently, Tesla stock has been on a wild run even by its own unconventional standards.
Since mid-December, it has lost 43%.
That is a big percentage fall for any share. But bear in mind that this is a huge company. Even after that share price crash wiped hundreds of billions of pounds off its stock market capitalisation, Tesla is still valued at around £660bn.
Clearly, then, the market still attaches a huge potential value to Tesla’s future business value. Given that, does it make sense for me to add some Tesla stock to my portfolio for the first time, at a far cheaper price than I would have paid just a few months ago?
After all, as billionaire investor Warren Buffett says, the time to be greedy is when others are fearful.
Knowing what kind of investor you are
But while I understand the logic in the Sage of Omaha’s comment, it does not mean that any situation where investors are fearful offers an opportunity.
Far from it. No matter how far a share falls, it can always fall further as Buffett himself has experienced many times in his career.
He changed his approach early on from looking for shares that looked cheaper than their value when focused on things like the balance sheet, to trying to buy into great business at attractive prices.
That is different to the approach some investors take. Some are hardened value investors, for example, while others like long-term growth stories and tend to focus on the business potential more than the current share valuation, in the hope that a fast-growing business can transform a share price.
Tesla’s valuation still looks unjustifiable to me
That is not my approach, although I would note that Tesla’s revenues last year barely shifted and its car sales volumes fell for the first time, albeit only slightly.
So I think the growth story at Tesla has become less compelling than it was five years ago. With stronger competition from rivals like BYD, I reckon that could be a structural change in the market, not just a statistical blip.
I approach the valuation issue more from the perspective of Buffett (incidentally, a long-term BYD shareholder). The question I ask when considering whether to add Tesla stock to my portfolio is whether it is a great business trading at an attractive price.
Despite its current challenges – and boss Elon Musk’s vocal political participation is a risk to car sales, in my view – Tesla is a great business.
It has proprietary technology, a large installed user base, and a powerful albeit increasingly polarising brand. Its vertically integrated business model has given it strong profit margins even as competitors rack up losses.
On top of all of that, vehicles are only one part of the offering. Power generation is a fast-growing part of the Tesla offering that I reckon has huge potential.
But the risks I mentioned above could see earnings decline further after a sharp fall last year – and Tesla stock already trades on a price-to-earnings ratio of 133. That looks very high to me. I will not be investing.
