Time and again throughout its history as a listed company, Tesla‘s (NASDAQ: TSLA) looked pricy on many common valuation metrics. But often it has confounded sceptics. Over the past year alone, Tesla stock is up by 33%. On a five year basis, the share price has soared 223%.
So could it be that what looks to me like an overpriced stock actually turns out to be a potential bargain from a long-term perspective?
A pricey-looking business
Let me explain first why I see Tesla as overpriced. Its main business is cars. Making and selling them has traditionally been an industry with decent but not phenomenal profit margins, although add-on services can be lucrative.
Tesla’s vertically integrated manufacturing and sales model has helped it achieve better profit margins than some rivals when things have been going well.
But the car industry is crowded and competition among electric vehicle (EV) makers is intense, putting pressure on profit margins.
On top of that, Tesla has had some specific problems of its own this year that have seen sales volumes slide markedly in the first half. They include impact on some customers’ preferences due to its boss’s political involvement, as well as an increasingly narrow-looking product range compared to some rivals. The looming end of lucrative US tax credits could also hit Tesla’s profitability.
As well as cars, Tesla has a power generation and storage business. Again, it is an industry that is competitive but can support decent though not stellar profit margins.
The year-on-year revenue decline in the first half suggests to me that this business may be struggling to add new clients at attractive price levels.
With those two businesses accounting for the majority of Tesla’s revenues, I reckon its $966bn market capitalisation and price-to-earnings ratio of 179 both look hard to justify.
Tesla has some possible growth drivers
Still, what if I am missing something? After all, plenty of other investors seem to value Tesla stock much higher than I do.
That does not mean they are right, of course, but I do think it is important as an investor always to try and see both sides of an investment case.
Although the car business has had a rough 2025 to date, it still has sizeable economies of scale and has in the past overcome substantial business obstacles.
Meanwhile, Tesla is using its expertise learnt from the car business to try and break into other areas of potential opportunity, such as self-driving taxis and robotics. If they do very well, the current Tesla share price may ultimately turn out to be a bargain.
Excitement about the massive potential of these markets helps explain the dizzying Tesla stock price, in my view. But I see that as a possibly costly error, since if I invest now and those businesses end up going nowhere (possibly burning through a lot of cash along the way), I could end up losing money if Tesla stock goes down to a more modest valuation.
So for now, I will continue to keep an eye on the company, but have no plans to invest.
