There is almost always a large number of people willing to explain what they think about Tesla (NASDAQ: TSLA). But whatever one’s view of the Tesla stock price at any given moment, or its investment case more generally, this is a share that has helped create many, many stock market millionaires over the years.
I have no plans to buy Tesla stock at its current price. However, I think its performance over recent years offers multiple possible lessons for investors including myself.
Here a handful of them.
1. A big addressable market is desirable, but not enough
Tesla’s business success has been built on the back of a large and growing market for electric vehicles.
But some other electric vehicle companies have fared far worse.
This strikes me as a useful reminder that a large addressable market is only the start of things. As an investor, one ought to ask what competitive advantage a company has that may help it prosper in that market.
2. Look at the source of profits
For years, Tesla burnt through cash. Now it is profitable – but one of the risks to those profits is the end of lucrative tax credits in its home US market.
The lesson? Knowing not just how much money a company makes but also how it makes that money is important.
3. Getting to grips with valuation metrics matters!
To me, Tesla’s current valuation is ludicrous. But clearly to some investors it is not. Otherwise, sellers would outnumber buyers and the Tesla stock price would fall.
I look at a number of valuation metrics, including price-to-earnings ratios. On that basis, Tesla looks badly overvalued to me.
Yet, many investors view things differently.
Maybe they are looking at potential future earnings. Maybe they are considering the price-to-sales ratio. Perhaps they have a different valuation metric.
Time will tell what approach worked best. The point is that different investors each have their own approach when it comes to valuation.
I am happy to stick to my own, but I think it is helpful to try and understand how other stock market participants are deciding what they think is a fair price for Tesla. Do they see something I am missing?
4. Dividends are not the only route to build wealth
Tesla is profitable – but it has never paid a dividend.
That is true of many companies.
Over the past five years, Tesla stock has soared 134%. So an investor who bought into the carmaker five years ago would now be sitting on a handsome profit.
That is despite the lack of dividends. I see that as a useful reminder that, while dividends can be one way to build wealth in the stock market, they are not the only one.
5. Different investors’ opinions can vary dramatically
At any point over recent years, there were many people who reckoned Tesla stock looked cheap – and many who reckoned the company was overvalued. The same is true today.
The stock market is a market precisely because different investors value companies differently. What some see as a bargain, others may think is overvalued.
Time will show who is right. But it can be helpful to remember that, just because others disagree with our views as investors, does not necessarily mean we are wrong – or right!
