Some people think shares are cheap just because their price is much lower than before. Tesla (NASDAQ: TSLA) shares, for example, are 28% below their price at the start of the year. But I think a much more relevant way to value shares is to compare their current cost to what I expect a company to be worth over the long term.
On that basis, then, could buying Tesla stock for my portfolio in coming weeks potentially help me scoop up a long-term bargain?
Challenging business environment, but some strong characteristics
Based on its proven performance to date, I do not think so.
Tesla has fallen like a hot brick over the past few months, but in the long term the stock has done very well. Over five years, it has grown by 525%.
Even after recent falls in value, that means the company has a market capitalisation of over $900bn.
Now, it is a successful car company. Its vertically integrated manufacturing and sales model has previously helped it achieve much better profit margins than most rivals. It has a large installed customer base and a strong brand, albeit one that has suffered lately due to its chief executive’s high political visibility.
Still, does any of that merit a price tag north of $900bn? I do not think so.
Add into that recent concerning signals about declining performance.
The electric vehicle market has been getting very competitive, putting pressure on margins across the industry. Tesla’s sales fell slightly last year – and its most recently quarterly numbers were sharply lower than the prior year quarter.
Not just a car company
Based on that, not only do I think Tesla does not merit its current share price – I fear it could head much lower.
There is more to the Tesla story than just cars, though.
Trucks are supposed to be coming at volume soon (though that has long been the case). Automated taxi fleets and robotics are two other areas where the company plans to use its software, design, and automation expertise.
For now, though, plans are only that. The businesses are yet to prove they can get off the ground, let alone make money. So I see those as highly speculative ventures when it comes to attaching a high price tag.
That brings us to the one other thing I think might justify the current price tag: power generation and storage.
Not only is that business already up and running, it is growing fast. In the first quarter, revenue grew 67% year on year to $2.7bn. Meanwhile, it deployed 154% more storage than in the prior year quarter.
Tesla has expertise in this field and its growing sales are encouraging. But the much higher growth in capacity than revenues suggests it may be lowering selling prices or achieving a different product sales mix, hurting profit margins. In the long run, I see power as a potentially lucrative business, but not one that yet justifies a massive valuation.
Some of Tesla’s emerging businesses could yet soar as its car business did for years, potentially making today’s share price a long-term bargain.
Looking at a sum of the parts based on current performance, though, I do not think Tesla even merits its current share price. I will be avoiding it in May.
