Can nothing stop Tesla (NASDAQ: TSLA)? Tesla stock is up 19% over the past year alone – and 53% over five years.
Yet last year was hardly a banner year for the company. Its car sales volumes fell for the second year in a row – and while the prior year’s fall had been small, this time around it was a much bigger drop. Profits fell sharply.
Meanwhile, the market for electric vehicles is becoming more competitive.
Key US tax incentives have ended, while rivals such as BYD are growing strongly. That suggests Tesla’s problems are company-specific, rather than an industry-wide sales downturn.
Yet despite it all, the Tesla stock chart maintains a long-term upwards trajectory, even though it has moved around quite dramatically along the way. Tesla commands a market capitalisation of $1.3trn, versus net income last year of under $4bn.
Such a valuation looks unjustifiable to me.
But clearly lots of people continue to own Tesla stock in the hope of future price gains (it does not pay a dividend). Can nothing stop it?
The narrative versus the business
As Warren Buffett likes to say, in the short term the market is a voting machine, but in the long term it is a weighing machine.
I interpret that to mean, over the long run, the market will end up ascribing a valuation to a business based on how well it performs, not whether investors are excited by it.
Things do not always work out exactly like that, of course, but I reckon Buffett’s point stands.
What about Tesla? At this point it still feels to me like the stock price is being decided by a voting machine, not a weighing machine.
Sure, the car business is substantial even after volumes fell. Yes, Tesla is profitable. And I understand that there is more to the company than cars. Its power storage division had a record year last year and Tesla is positioning itself for new business areas such as automated taxis and robotics.
But much of that is speculative for now – whether Tesla can compete on a commercial scale in self-driving taxis and robotics remains to be seen. It faces stiff competition.
By contrast, its power business is proven and has ongoing space to grow. But it is a fraction of the size of Tesla’s car operations. So a $1.3trn market cap for the whole caboodle remains far too high in my view.
Tesla has done a brilliant job of laying out a narrative that excites investors. But, for now at least, I think the business performance and stock price bear little relation to each other.
Up or down?
Still, an exciting enough narrative could keep propping up the price in the short- to medium-term – or even push it higher.
If the car business recovers, that could help the stock price. If Tesla can build a big enough business in either automated taxis or robotics, let alone both, I think that could also justify a higher valuation than today.
But those are big ifs.
Looking at the business as it actually stands now and how I assess its prospects, I reckon Tesla stock is badly overvalued. I will not be investing.
