It has been a dizzying year for investors in Tesla (NASDAQ: TSLA). On one hand, the December high of almost $480 seems like a distant memory, with Tesla stock having fallen 33% since then.
On the other hand, the stock is still riding high from a long-term perspective. In fact, it is now 77% higher than it was a year ago.
I am wondering whether it can get back to that $480 level and a bit higher, to break the $500 mark – and should I invest?
Lots of emotion not financial rationality
Some shares move based largely on their financial fundamentals. If the company issues a profit warning, its share falls. When sales rise, the share price moves up.
Tesla is different. A lot of the moves in its stock seem only loosely (if at all) related to financial performance. They are driven by investors’ views about what the company might achieve in future, sometimes far in future. I think there tends to be a fair dose of emotion not rationality involved in some cases.
Take the role of the chief executive as an example. How much would the stock collapse if he was run over by a bus (or self-driving Tesla) tomorrow?
My guess is it would crater. That alone flags up the enormous key man risk in this stock. A lot of the value is being attached to current company leadership, not the company itself. But leadership can change.
Great potential and a proven track record
Even at the current stock price, Tesla trades on a price-to-earnings (P/E) ratio of 177. That strikes me as unjustifiably high. But the stock price would need to move 53% higher to hit $500, implying an even larger P/E ratio.
Obviously, investors are currently valuing the company based on its prospects. From self-driving cars to robotics, Tesla has lots in development that could boost its sales massively.
Nor is this just some implausible startup. With its car business, Tesla has already demonstrated that it is able to scale up massively from scratch, overcome sizeable hurdles, and become profitable. So, that proven capability adds credibility to its plans for further business development.
But we are years away – at least – from those business areas becoming significant contributors to the company’s bottom line, if they ever do. The power storage business is growing fast but I think that is already reflected in the current stock price.
Meanwhile, the company’s car sales volumes fell slightly last year and dramatically in the first quarter of this year. Just getting back on an even keel, let alone returning to the sort of high growth seen historically, will require a lot of effort. The electric vehicle market is far more competitive now than a few years back.
Taken together, Tesla right now looks like a car company with its work cut out, a decent power storage business with strong growth prospects, and some other ideas that have yet to prove their commercial viability.
On that basis, the current P/E ratio seems ludicrously high to me. If there is enough good news and it fuels investors’ hopes, maybe Tesla stock will hit $500. Rationally, though, my concern is that it is overvalued, not undervalued. I will not be investing.
