It is pretty fashionable to knock Tesla (NASDAQ: TSLA). The stock has fallen 24% already this year and there are increasing reasons many investors feel bearish about the tech giant.
Still, Tesla has a long history of share price volatility. It has defied critics on many occasions before to bounce back.
Indeed, while the share has tumbled lately, it is still 39% higher than it was a year ago – and up 223% over a five-year period.
Even after its recent price tumble, Tesla commands a market capitalisation of $957bn. So could it yet make a stunning comeback? Or might the fall so far this year end up being only part of a larger decline?
Multiple alarming business indicators
At the moment, Tesla has two sizeable businesses. One is in cars. As well as selling them it can include revenue from the likes of software subscriptions. The other meaningful business is in power generation and storage.
Last week, the firm released its second quarter financial results. They brought bad news on more than one front. Automotive revenues for the second quarter fell 16% year-on-year. That is not as bad as the 20% year-on-year decline seen in the first quarter, but it is still a worrying drop.
Not only that, but energy generation and storage revenue also showed a year-on-year decline of 7%. As this is supposed to be a key growth driver alongside the car business, that was a concerning development that brings the growth narrative of this division into question.
One bright spot was services and other revenue. Its 17% revenue growth compared to the prior year period meant that total company revenues declined 12%. I see that as very weak for a company priced with the sort of growth expectations implied by Tesla’s stock price.
Current businesses struggle to justify the price tag
With intense competition from rival car makers such as BYD and increasingly Xiaomi, Tesla’s car volumes could remain subdued. Such competition could also squeeze profit margins. Add to that the end of significant tax credits in the US later in the year and Tesla’s profitability could be even more threatened.
With weak performance in its two key businesses, I think the current Tesla stock price looks badly overvalued.
Some grounds for optimism
Could anything justify that price or a big move upwards for it? Turning around the car business would help restore confidence in management. However I think it would have to involve a massive reversal in sales volume declines to justify a market capitalisation currently close to $1trn.
The great hope for bullish investors is robotics and self-driving cars. With its proprietary software, installed user base and vast understanding of user behaviour, Tesla does have strengths that could help it do well in both businesses. If it does, today’s Tesla stock price could turn out to be a long-term bargain.
However, rivals including Xiaomi also have their own strengths in things like self-driving technology. For now, these early-stage projects remain development ideas for Tesla, not commercialised businesses. Lots could go wrong between now and commercialisation.
So I think one part of the business looks overvalued and another part currently deserves only a modest valuation as it is unproven. I therefore see Tesla stock as badly overvalued and have no plans to invest.
