A decade ago, few people would have predicted quite how spectacularly Tesla (NASDAQ: TSLA) would perform in the years to come. Sales have boomed – and the Tesla stock price has soared.
This has long been a share that sharply divides opinion, with wild fans and deep sceptics, as well as a broad range of viewpoints in between.
But I have no plans to invest at today’s price. Not only am I fearful that the share may not be valued higher a decade from now, I am not even convinced it can hold its current price.
Key questions to ask
Some of the excitement around Tesla pertains to how lines of businesses may evolve that are still small or non-existent for the firm, from robotics to self-driving cars.
As an investor, though, I think such excitement can obscure some more basic questions.
For example, what markets is Tesla going to compete in? How big will those markets be? What does Tesla have that could help set it apart? How well might it be able to monetize such opportunities?
A rapidly evolving business environment
Tesla’s success over the past decade points to some strengths but also challenges for the company over the coming 10 years.
Demand for electric vehicles has boomed. I expect that trend to continue. But the competitive landscape has become increasingly crowded, with Tesla’s sales volumes recording their first annual decline last year. Such competition has hurt profitability.
Tesla’s competitive position looks weaker than it once did, with rivals offering more models at a wide range of prices.
Could Tesla’s vehicle business still grow in the coming decade, despite recent year-on-year declines in sales volumes? It could, as its third-quarter figures demonstrated.
But increasingly as the market matures, I think Tesla deserves to be valued more like a car company than a tech company.
Ford’s price-to-earnings ratio is 15. Electric vehicle market leader BYD’s is 21. Tesla’s is almost 12 times as high, at 249.
Lots of ideas, but limited proof of concept
Ah, but did I miss something?
Well there is the power generation and storage business for one thing. That looks to me like it has ongoing growth potential.
Still, like the vehicle division, this is essentially a new take on an old, mature market. Does it justify Tesla stock having a valuation anything close to its current level? Not in my view, even when considering the growth prospects in the coming decade.
Then there are newer fields, such as self-driving cars and robotics. I do not think that the vehicle or power generation business alone can justify anything like today’s Tesla stock price. So, for it to be sustained for the coming decade — let alone increase — I think such areas need to deliver substantial revenue growth.
Can they do it? Possibly. Both have massive growth potential. Tesla does have strong expertise in robotics and automation.
So do lots of other companies – and like electric vehicles, the field is getting more crowded.
I think Tesla stock is priced with the expectation that it will blow out the lights in these fields – but that remains to be seen. For now it has yet to commercialise a robotics or self-driving business at scale.
On that basis, I think Tesla stock is badly overvalued.
