Worries about sales volumes. Concerns about costs. Doubts about product launch timelines. A worsening competitive environment. Are those the factors weighing on Tesla (NASDAQ: TSLA) today? Or the ones that weighed on it five years ago, since when Tesla stock has gone up 62%?
The answer is: both.
Tesla has long attracted sceptics when it comes to the stock price valuation.
But it commands a $1.4trn market capitalisation.
That is 298 times earnings, which to many investors may look like an unjustifiable valuation.
But Tesla has confounded stock market critics in the past – might it be able to do so again?
The basic source of confusion
As I see it, different people are valuing Tesla using alternative approaches.
One is to look at it as a car company, with a much smaller but growing power generation and storage division bolted on.
With a large customer base, sizeable distribution network, and proven business model, the car business is certainly worth something.
But is it worth $1.4trn?
General Motors has a market cap of $77bn. Electric vehicle rival BYD has a market cap around $120bn.
So, even allowing for the worth of the power business, Tesla’s valuation looks crazy to me when considering primarily its car business.
That is especially so when accounting for risks such as growing competition from the likes of BYD and the end of buyer tax incentives in the US.
But there is an alternative approach to viewing Tesla. In that approach – and it explains much of the Tesla stock price in my view – the car business is just the beginning.
By building on it, Tesla can expand into self-driving taxis, robotics, and perhaps other business areas too. That could see revenues soar.
An investor’s dilemma
I see a big gap between what Tesla is worth as a car company and what it could be worth if it expands into other areas at scale.
It has a track record of fast growth and scaling up, achieving results that many cynics doubt it will do. That helps burnish the case for Tesla’s potential when it comes to things like robotics.
Now, this is a common dilemma for an investor and not just when it comes to Tesla. Should we value a company based on what it is worth today, or what is worth based on certain assumptions about future performance?
When investing, I definitely do consider a company’s likely future prospects. But trying to assess how a business might perform in future can be very difficult to do with a high level of confidence.
Looking for a margin of safety
Based on its proven ability to build businesses, I am willing to give Tesla some benefit of the doubt about the likelihood of it achieving its ambitions.
But even so, a $1.4trn market capitalisation offers me no margin of safety if Tesla’s future performance undershoots some expectations.
Tesla stock has soared in the past as if disconnected from current business performance – and I reckon it could so again in future. But given the disconnection I see between business value and share price, it could also crash.
I will not be investing.
