There is a rarely a shortage of negative headlines when it comes to car maker Tesla (NASDAQ: TSLA). But far from being in the doldrums, Tesla stock is on fire.
It has gone up by 90% over the past year alone. That means it now stands 223% higher than five years ago.
Thanks to that stunning performance, Tesla now has a market capitalisation of $1.5trn.
Could things get even better from here?
What’s driving the Tesla share price?
Getting to a market cap that big is a massive achievement. What has been behind it?
Part of the reason is that Tesla has built a sizeable business, both in vehicles, and power generation and storage.
By creating that from the ground up in a comparatively short time, Tesla has demonstrated that it is able to move at speed, scale up, and turn the corner on profitability in its once-lossmaking car business.
That has given investors strong hopes for the future of the company, even though last year and the first half of this year saw sales in the car business decline year on year.
The third quarter was better and indeed the power unit recorded its best-ever performance then in terms of the amount of power deployed.
But cars and the much smaller power business cannot justify a valuation anything like that implied by the current Tesla stock price.
Instead, I think a lot (arguably most) of that is down to investor hopes about where the business goes from here.
From self-driving taxis to robotics, Tesla hopes to make waves in a number of business areas. Its AI expertise, tech prowess, and business-building capabilities are all strengths in that regard, in my opinion.
Lots to prove – and lots remains unknown
But, as an investor, I find that rather troubling.
After all, Tesla has yet to prove its business model at scale (and arguably at all) in those areas.
There are lots of things we do not know, from the market size to its long-term profitability. But what we do know is that Tesla already faces strong competition in self-driving taxis and robotics.
In both areas, I am not persuaded that it has a competitive advantage that no rival can match over time.
Maybe that will change. But as an investor I aim to buy shares (or not) based on what I know today and what I can predict about likely future performance with a sufficient level of confidence.
No crystal ball
If someone asked me now what I expect Tesla’s revenues to be from self-driving taxis a year from now, five years from now, or in a decade, I would struggle to come up with an answer in which I had even a modest level of confidence.
When it comes to profit, I think I would feel even less confidence in my ability to judge.
We simply do not have enough information now to make well-informed estimates of the long-term economics of Tesla’s emerging businesses, as far as I am concerned.
If enough investors stay enthusiastic about the prospects, Tesla stock could keep moving upwards.
But on its fundamentals, I already see Tesla as badly overvalued and have no plans to invest.
