When it comes to setting investors’ pulses racing, Tesla (NASDAQ: TSLA) often seems to do the job. Tesla stock can move around a lot for such a big company – it is down 28% since December, for example.
But, over the past year, it has moved up 52%. Over the past decade, it has moved up 1,985%.
That sort of performance certainly grabs my attention as an investor!
Investing based on business fundamentals, not momentum
So, given Tesla stock’s strong recent momentum, could it make sense for me to add it to my portfolio?
Momentum is never guaranteed to last. After all, past performance is not necessarily a guide to what will happen in future.
Instead, then, I prefer to look at the fundamentals of a business.
Here, at least as the business stands today, the Tesla stock price simply makes no sense to me. It is currently 202 times earnings.
That looks woefully overpriced to me even before considering the possible hit to earnings this year from weaker car sales (first-half sales fell sharply) and the end of certain tax credits in the US.
Lots of optimism already factored into the price
So, what is going on?
In short, investors seem to be valuing Tesla based on what they expect it to achieve in the future, not necessarily how it is performing now.
There is nothing wrong with that, in my view. When investing, I always focus on what I see as a company’s future prospects.
But where I do have concerns about the prospect of putting my money into Tesla stock is whether its future prospects look as strong as the current price suggests.
I reckon the current share price involves a large amount of investor optimism about the firm’s future financial performance. But is it merited?
Doing is harder than saying
I think only time will tell.
Tesla has repeatedly confounded its critics in the past and has built a huge business at speed. That gives me confidence in management’s ability to achieve demanding goals.
That said, Tesla’s car business has seen demand fall sharply this year. That could continue. Even if it does not and demand recovers, profit margins could shrink due to competitive pressure on pricing and the end of the US tax credits I mentioned.
Meanwhile, although Tesla’s power generation and storage business has substantial long-term growth potential, power businesses tend not to attract outsized valuations. Duke Energy trades on a price-to-earnings (P/E) ratio of 20, for example, while American Electric Power has a P/E ratio of 16.
A lot of the justification for the current Tesla stock price, then, must be in the prospect of growing businesses such as robotics and self-driving cars.
If those businesses scale up dramatically at speed, perhaps the Tesla stock price could keep moving higher.
For now, though, such new businesses are basically at no more than a trial stage. It remains to be seen whether they are commercially viable. Tesla faces heavy competition in such areas and some rivals are well ahead of it.
So I think the Tesla stock valuation is too high and have no plans to invest.
