Tesla (NASDAQ:TSLA) stock is actually down around 10% over the past two weeks. The dollar is also flat against the pound over the period, so £10,000 invested then would be worth £9,000 today.
That’s clearly not a good return, but it’s only been a couple of weeks. Successful investments should be measured over a number of years and not weeks or months.
Valuation remains ludicrous
Despite the stock dropping 10%, the valuation remains very hard to justify in the near and medium term. It’s currently trading around 194 times forward earnings. That’s a 965% premium to the industrials sector average.
It’s important to note that very few companies, even the big tech leaders, have valuations anything like this. Nvidia, for example, is trading around 22.6 times forward earnings.
Why is this interesting? Well, Tesla’s future success in automation and robotics will be built on, in part, Nvidia chips. For context, training for the Tesla Optimus humanoid robot is supported by a massive cluster of 100,000 to 200,000 Nvidia H100 GPUs, according to reports.
The more Optimus is rolled out, the more Nvidia chips are going to be required.
However, I am simplifying things. Tesla is expected to grow earnings by 35.7% annually over the medium term. If that’s sustainable throughout the next 10 years, then the company is probably fairly valued or even cheap.
Let’s run the maths. This means in 10 years, Tesla’s earnings would be 21 times larger than they are today. This would mean it’s trading around 9.2 times forward earnings for 2036.
If you want the stock to double in price over that decade, the terminal price-to-earnings would be 18.3 times, which is roughly the historical average for the S&P 500.
It’s all about assumptions
I’ve tried to provide some forecasting logic to the long-term prospects. But in reality, it’s anyone’s guess.
It’s worth considering that Tesla’s robotaxis and Optimus robots could be surpassed technologically by other vendors. In which case, Tesla would be vastly overvalued.
On the other hand, there’s the extremely bullish forecasts from the likes of Cathie Wood: tens of millions of robotaxis on the road and every household having a robot.
I’m also bullish operationally and expect to see the company merge with SpaceX as Musk’s Mars vision — a settlement on the red planet — becomes a reality.
It might sound like science fiction, but I genuinely believe we will see the Optimus robot on Mars in the not too distant future.
The potential merger also begs another question. Do investors want to own a piece of SpaceX? Personally, I do, but I get my exposure through Scottish Mortgage Investment Trust, which is around 20% SpaceX.
So, what’s my take? Well, buying Tesla wouldn’t fit my normal approach to investing. I like to find stocks that have great potential but are clearly undervalued based on metrics.
For me, it’s not worth considering yet, but it may be right for other investors.
