Over the long run, a lot of people have made a lot of money from investing in Tesla (NASDAQ: TSLA). At repeated points over the past decade, Tesla stock has looked potentially very overpriced. There have been some dramatic swings in the stock price, including over the past year, but the long-term performance has been very impressive. In the past year alone, it has moved up 57%.
So, although there are certainly storm clouds gathering around Tesla at the moment, I for one would not write the company off — or anything near it.
It has confounded many investors’ expectations repeatedly in the past – and could do so again.
The valuation looks much too high to me
That said, the current Tesla stock price is far higher than I think it ought to be.
Tesla’s core business of selling electric vehicles faces challenges on multiple fronts. Competition in the space has heated up dramatically, putting pressure on profit margins.
The Tesla brand has been badly damaged in some markets by its boss’s involvement in politics. Meanwhile, the end of select tax credits for electric vehicles in Tesla’s home US market could also eat badly into its profits.
Sales volumes fell sharply in the first half of this year compared to the same period last year, while profitability is under threat, too. Besides cars, the power generation and storage business has been a bright spot until recently. But its first-half performance suggests that it may be struggling to grow sales volumes while maintaining profit margins.
Meanwhile, the company’s robotics plans remain little more than that – Tesla is yet to commercialise its robotics technology at scale. Like electric vehicles, it is a business area with significant and growing competition.
Self-driving taxis are at least on the road in a limited real-world test. But so far that has been less impressive than many investors hoped for. While the taxis do not need a driver, they do need a company representative in each journey, considerably reducing the financial attractiveness and entire point of the self-driving proposition.
If things go well, the stock could potentially go up. Tesla has a large installed base of owners, strong brand, proprietary technology, and extensive manufacturing footprint.
Given the list of challenges, though, the Tesla stock price and market capitalization of $1.1trn both look far too high to me. I have no plans to buy at this level.
My plan of watching and waiting
But I do see Tesla as a business with fundamental strengths. At the right price, I would be happy to add some Tesla stock to my portfolio.
So, if the price crashes at some point, will I be buying some?
Not necessarily. It would depend on the reason for any such crash. If the market simply marks Tesla down for the reasons I mentioned above and it hits what I see as an attractive price (a long way below its current level), I would consider buying.
But if the price falls because of worsening business performance, even a much cheaper stock price could still offer me bad value.
So, I will be waiting to see not only how the price moves in coming months, but also how the business prospects evolve too.
