There is rarely a dull moment when it comes to Tesla (NASDAQ: TSLA). The carmaker has faced no end of detractors this year – yet Tesla stock has jumped 30% in the past month alone.
That means it is 82% higher than where it was just 12 months ago – and has more than tripled over five years.
Why has the share done so well lately – and ought I to invest in the hope that the long-term valuation could move further upwards even from here?
Positive news has lifted investor enthusiasm
The news that Tesla boss Elon Musk was investing another $1bn in Tesla stock gave some investors confidence. If the company’s leader was willing to put big bucks into its shares, they figured, might that mean that he saw long-term value at the current price?
It may. But basing one’s own investing on what others do, rather than taking your own situation into account, can be a bad move.
Different investors have their own objectives. Musk’s huge investment may not necessarily be based on purely financial considerations. For example, the investment could be one way to try and help boost investor confidence in what has been a challenging year for the carmaker. It certainly seems to have done that!
Another piece of good news came this week. Tesla’s latest quarterly report revealed that the business delivered just short of half a million vehicles during the period. That was an all-time record.
Lots of challenges remain
At face value, that is great news. However, the looming end of electric vehicle (EV) tax credits in the US likely brought forward lots of sales. So it will be interesting to see how well vehicle sales do this quarter and beyond.
Meanwhile, some of the challenges that have bedevilled Tesla lately have not gone away. Pricing pressure in the EV market remains intense, for example. That continues to weigh on profitability.
Tesla still has great promise
That said, this was a great quarter for Tesla’s sales volumes. And the good news was not limited to the car business. The firm’s energy storage division also reported a new all-time record for deployment of its products.
Such positive momentum helps explain why Tesla stock has been soaring lately. A lot of investors seem to reckon the company is putting its rocky first half behind it.
If it can do so – and scale its self-driving taxi and robotics technology commercially – then the company may be able to grow revenues strongly in years to come.
I’m not persuaded, at this price
But revenue and profits are very different things. The end of tax credits could hurt Tesla’s profitability badly. Yet Tesla stock already sells for 253 times earnings. That looks very expensive indeed to me.
Putting a tough first half in the rearview mirror is one thing. That can help explain investor enthusiasm. But it does not solve the fundamental problem I have with Tesla: I think its stock price is far too high relative to its long-term business prospects.
After all, self-driving taxis and robotics are currently closer to being ideas in test than proven businesses. The car business had a good quarter, but its market economics remain tough.
With its market capitalisation of $1.4trn, Tesla looks too expensive for me to invest.
