It has been a horrible few months for Tesla (NASDAQ: TSLA). The electric vehicle innovator saw first-quarter sales decline steeply year on year. Earnings fell dramatically and Tesla stock is now 29% below where it started the year.
Despite that, though, it is still a remarkable 426% higher than five years ago. That is the sort of return most investors can only dream of.
I also see it as a good reminder to focus on the long term as an investor, no matter what the headlines might be shouting on any given day.
Given that, could the recent fall be the sort of opportunity I have long been waiting for to add some Tesla stock to my portfolio at an attractive price?
What makes for brilliant investments
One long-term investor in rival BYD (but not Tesla) is billionaire Warren Buffett.
Buffett’s approach to investing involves aiming to buy stakes in outstanding businesses at attractive valuations. That sounds sensible to me and, as Buffett has demonstrated, can make for some brilliantly rewarding long-term investments.
I will get onto Tesla’s valuation in a moment. But to start, is it an outstanding business?
For me, the answer to that question is a resounding “yes“. Tesla has gone from nowhere to being a huge global car producer within a couple of decades. First-quarter profits fell sharply, but it remains profitable while many rivals continue to spill red ink.
The company is also aggressively expanding ways in which it can use its intellectual property. It has already developed a large energy storage business and its year-on-year growth in the first quarter was strong.
Tesla is also planning to scale up lorry production to commercial levels, launch self-driving taxis, and compete in the fast-growing robotics business.
With its unique technology, strong brand, profitable core business, and large customer base, I see this as an outstanding business.
Is a cheaper share price a cheap valuation?
What, then, about the other part of Buffett’s formula – the valuation?
Here, I feel, the investment case for Tesla even after the recent stock price fall looks less clear-cut.
I am not in two minds – I simply feel the current share price is far too high for my comfort and would offer me an insufficient margin of safety as an investor.
If everything goes brilliantly, the current share price could be a long-term bargain. While Tesla’s sales have fallen sharply, it remains a substantial electric vehicle market competitor and has historically proven it knows how to grow sales.
Self-driving taxis alone may well be a huge new market and I reckon the power storage division could double down on recent growth to become a huge business over time.
But as an investor, I am more focused on what is happening and what I consider likely, rather than what may be possible if everything goes according to plan (which rarely happens in business). Tesla faces many rivals in its new businesses and success is uncertain.
Yet it trades on 159 times earnings. For me at least, that is far too expensive to consider making a move.
