Who’d have thought high-flying Tesla (NASDAQ:TSLA) stock could fall back to earth so painfully? From an all-time high of over $488 in December, we’re looking at a crash of around 50%.
But we know what that means. It’s time to ask if the price fall’s overdone based on short-term fears.
Personality
The Elon Musk effect has been turning investors away from the stock. Many simply oppose his high-profile political activity. But in practical terms, can he really keep his mind focused on running his business while playing a big part in running the USA?
Some might argue that Tesla doesn’t actually need Musk active at the helm 24 hours a day. But the proposed $56bn pay package he was awarded by shareholders suggests he’s seen as pivotal. Me? I prefer to see a company run by someone a bit more boring and with fewer things to take their attention elsewhere.
It’s been said a week is a long time in politics. But even a few months can be a very short time in business for investors looking ahead. I think anti-Musk sentiment will fade.
Market size
The tariff war doesn’t help. It increasingly isolates Tesla from China, one of the world’s big upcoming markets for electric vehicles (EVs). And it helps boost Chinese EV companies to catch up and overtake.
But even the American market is a lot bigger than many of us might think. In 2024, Tesla’s revenue came close to $98bn, with about $48bn of that coming from its home market. What’s the total car market in the US worth? It’s been estimated at around $1.6trn in 2024, and growing.
Tesla accounted for a mere 6% of the US car market in 2024. Anyone who thinks there’s no potential growth without China needs to think again. And Tesla still has a serious advantage in techology and infrastructure.
Valuation
But then it all comes back to the one thing I really don’t like about Tesla stock. Its sky-high forecast price-to-earnings (P/E) ratio hovering around 100 just makes me twitch.
I know analysts expect earnings growth to push that down to under 60 by 2027. But have these forecasts really been adjusted to account for the tricky sales patch the company’s currently in? I’m not sure they have.
I’ve been very wrong about high Nasdaq stock valuations in the past. And steering clear of some similar lofty ones has made me miss stocks that have gone on to reward shareholders many times over.
But even a comparison with other high-tech firms makes me nervous. Nvidia‘s forward P/E? Only 25. Apple‘s is 27, and Alphabet’s down at 17.
Bottom line
I see Tesla as full of contradictions. I still see great long-term profit growth prospects. But that valuation looks out of place, not just against my own liking for more attractive value ratios but also against the Nasdaq itself.
I’m not considering buying just yet, but if the price should fall further…
