Spending close to $1bn on shares in a single company is far from what most investors are used to. However, that is what Tesla (NASDAQ: TSLA) boss Elon Musk recently did. With the company’s leader spending a lot of money picking up more Tesla stock, could now be the time to add the company to my own portfolio?
Different investors can have different objectives
Musk has become the world’s richest man through a series of smart business and investment decisions, so clearly he knows a thing or two about how to deploy his capital.
I often pay attention to directors’ dealings in shares. Sometimes, when directors spend heavily on shares, it can indicate confidence in a company’s prospects. When they are selling shares hand over fist, it can indicate that they see reasons to be concerned about the current valuation.
That is not always the case, though. Directors are like the rest of us – they can buy or sell for a wide variety of reasons.
Maybe they urgently need money. Perhaps they need to settle a tax demand. Sometimes they are misguided about the prospects for the business. Occasionally they can miss something that seems obvious to third-party investors.
Not only that, but their objectives when investing and circle of competence may be totally different to mine.
So I look at directors’ dealings in case something pops up that I think merits further investigation. But I do not simply buy (or sell) shares purely because a company director has. That applies to Tesla stock, as well as any other firm.
I don’t see the value
Still, Musk – and many other investors – must have some reasons for investing in Tesla stock even at its current price. After all, the Tesla share price is 87% higher than it was just a year ago.
Tesla has a number of opportunities that could potentially grow into sizeable businesses over time. One is its power generation and storage arm. That is already a big business, with second quarter revenue coming in at $2.8bn.
That was actually 7% below the equivalent number for the same quarter last year, but the long-term story here feels like one of growth. The company has installed a large number of power storage products already and can benefit in future from its installed base as well as hopefully from new customers.
Tesla has also been trialling its self-driving taxis this year, another potential growth driver. Robotics may also be a future growth area for the company thanks to its Optimus product.
Lots to prove — and a dizzying price tag
But, aside from power generation and storage, these feel more like business ideas in trial than actual businesses right now.
Meanwhile, Tesla’s electric vehicle sales volumes have tumbled so far this year.
Combined with pricing pressure due to competition, that could see revenues for the car business fall. Those pricing pressures, as well as the end of certain tax credits in the US, might both hurt Tesla’s profitability.
Yet, with its $1.3trn market capitalisation ,Tesla stock sells for 247 times earnings.
That looks absurdly expensive to me given the risks the company is facing. I have no plans to buy Tesla stock.
