Falling sales, key tax credits cancelled, more competition putting pressure on selling prices. Ordinarily, those would seem like bad news for a business. They are just some of the challenges Tesla (NASDAQ: TSLA) currently faces. Yet despite that, Tesla stock has soared 67% over the past year.
That is not because it was cheap a year ago either. The 12-month jump means the company now commands a market capitalisation of $1.3trn. So is Tesla something other than an ordinary company?
The valuation makes no sense to me
I ask because I think it would have to be in order to justify the current Tesla stock price, let alone a higher one.
The carmaker trades for 246 times earnings (rival Ford sells for 15 times earnings). That is before even taking into account this year’s earnings potentially falling sharply, due to a combination of the declining vehicle sales volumes, tax credit withdrawal and pricing pressure I mentioned above.
Ordinarily, that is the sort of price-to-earnings ratio an industrial company would look far, far too high for my comfort. Indeed, I think Tesla is badly overvalued and I have no plans to buy its stock for my portfolio.
Could Tesla be one of a kind?
Clearly though, not all investors take the same sort of line I do. The price increase over the past year, even as the company’s business environment has worsened, could indicate that some investors see Tesla as an extraordinary company, not just an industrial company with declining sales that is battling to maintain profit margins.
As I see I, there are two key possible explanations for that. One is Tesla’s potential to expand into new lines of business, while the other is the opportunity for it to earn more from its customer base.
New business ideas are exciting – but not yet proven
To illustrate the first leg of the potential growth drivers, consider Tesla’s enthusiasm to develop a robotics business and possibly do more with artificial intelligence (AI). Both are things it has some experience with from its current car business.
So by exploiting its know-how and proprietary technologies, Tesla may be able to establish a position in robotics and other business areas. That could be a game-changer, bringing in huge revenues and potentially justifying the current Tesla stock price.
For now though, this is basically little more than an idea that is being developed. Tesla has yet to prove it has a commercially compelling robotics proposition at scale – and lots of other companies are also trying to do the same thing.
More money from existing customers
Historically, Tesla has proven it can earn money from customers after the initial purchase, for example selling car buyers software packages. There is more growth potential here. Tesla is trialling self-driving taxis (again, as are rivals).
If they work, in the end the firm may be able to let Tesla drivers earn money from their car when it is sitting idle, by offering it as a self-driving taxi. Tesla could take a commission.
Like robotics though, while not exactly fantasy, this is also very far from being a proven, scaleable business model.
Looking at Tesla today and what I see as its viable long-term commercial prospects, I still see its price as way too high and will not be buying.
