It has been a simply wild week for Tesla (NASDAQ: TSLA) on the stock market, with price swings that would be unusual for a much smaller company let alone one with its market capitalisation. I have long wanted to buy some Tesla stock for my portfolio if I could do so at a price that I felt was attractive, so have been waiting for such a moment.
For now, though, I have not made a move.
I continue to think Tesla is badly overvalued. As an investor, however, I try to see both sides of a situation. After all, a market is composed of both buyers and sellers at the same time.
As part of that, here are three reasons that could suggest Tesla stock may be a long-term bargain – and why I do not find them persuasive at the current price level.
1. Potentially enormous end markets
The basic way to think about a company’s prospective future sales is to consider how big its target markets are and what sort of share of those markets.
Tesla is already huge when it comes to sales. Last year, it reported $98bn in revenues.
The end market potential is enormous. Cars alone make for a large market, but Tesla has ambition to extend into other types of vehicles, from lorries to what are basically minibuses.
It also wants to extend into offering automated taxis. Taxi provision is another big market.
On top of that, Tesla has a fast-growing business in power generation. That market is vast and also resilient.
As if that was not enough, Tesla plans to compete in robotics.
2. Tesla has a lot of competitive advantages
Recently, a lot of investors have focussed on some of the risks Tesla faces.
Its chief executive’s high political profile could put off some customers. Tax credits in key markets could come to an end. The electric vehicle market has become much more competitive, leading to pressure on profit margins across the industry.
Those risks are all real in my opinion – and significant.
But risk is part of business and Tesla has long proven that it can navigate challenging commercial environments.
As well as risks, it benefits from a range of competitive advantages that might help it grow market share in those large end markets I mentioned above – something it has been doing in power generation recently.
Its high profile helps build awareness of the brand at low cost. It has deep expertise in automotive software, power storage, vertically integrated manufacturing, and a host of other areas. If it can convert its competitive advantages to profits, that could be good news for Tesla.
3. Proven earnings growth capability
For now, the price of Tesla stock puts me off buying. The price-to-earnings ratio of 124 is far too high for my tastes.
The risks I mentioned above could mean Tesla’s earnings fall sharply again, as they did last year.
But what if they go the other way? Not necessarily soon but in, say, five or 10 years?
Tesla went from being a heavily loss-making company for years to one that turned an annual profit in the billions of dollars. If it can grow its earnings enough in the long term, today’s stock price could turn out to be a bargain.
