Investors who like trying to unpick a good puzzle certainly have some material to work with when it comes to Tesla (NASDAQ: TSLA). The Tesla share price has soared 48% since April. Despite that strong performance, it still sits 19% below where it began the year.
That sort of volatility would be notable even in a small company with a low market capitalisation. But Tesla is a tech giant that, even after losing almost a fifth of its value since the start of the year, still boasts a market capitalisation of over $1trn. For that big a company, such price volatility is unusual.
So, what is going on – and might it present me with an opportunity to add the electric car maker to my portfolio?
Valuation detached from fundamentals
There have been some reasons to be upbeat about the financial outlook for Tesla this year. For example, its power generation and storage business is firing on all cylinders. Self-driving taxi trials in the US have been expanding.
But there have been lots of questions about where the business goes from here, in an increasingly challenging market.
Rival electric car makers such as BYD and Xiaomi have been expanding at pace. Not only has Tesla seen its car sales fall in the first half of this year, it also stands to lose US tax credits that have previously helped bolster its profitability.
Meanwhile, although Tesla’s self-driving taxi trials have been expanding, I reckon rivals including Alphabet’s Waymo have as much or even more right to win in this market as Tesla.
While Tesla has only recently launched trials in a single US city, Waymo already has a commercial self-driving taxi service up and running in that city and six others beside.
Despite those challenges – and the risk that falling sales could see earnings slump this year – the Tesla share price is 182 times current earnings. That looks ridiculously high to me when considering the fundamental financial performance of the company.
For now, I’m doing nothing
So, what might explain the erratic share price movement?
I think the jump since April reflects some calming of fears raised several months ago about the potential impact of US tariffs on Tesla’s business.
But while that risk may have lessened (in practice, I still think it is too early to tell), Tesla continues to face a very challenging environment on multiple fronts. That may partly explain why the Tesla share price has fallen by around a fifth so far this year.
Even after that price fall, the share continues to look too pricy for my tastes. On that basis, while I continue to see strengths in the Tesla business and would invest at the right price, for now I plan to do nothing.
