The Tesla (NASDAQ: TSLA) share price has had quite an exciting run since the start of 2020. The US stock climbed from $86 per share to around $900 in the space of a year. That’s nearly a 1,000% return in quite a short space of time. Since then, the stock has fallen and is now trading closer to $670 today. But that’s still a 240% return in 12 months. Is this business way overvalued? Or is now a good time for me to add it to my growth portfolio?
The bull case for Tesla
Ignoring the influence of Elon Musk’s tweets on Tesla’s share price, the underlying business has achieved several significant milestones over the years. The continuous innovation within its battery technology has led to significantly faster charging times, as well as longer battery life. This is particularly important as the limited range of electric vehicles has likely contributed to the slow adoption by consumers.
To date, Tesla’s electric vehicles retain the crown for the longest range thanks to its superior battery technology, with the Model S reaching up to 379 miles between charges. And this could be getting even better. In 2020, the company unveiled a new tabless battery design. This new architecture will allow the number of cells to increase from 2,170 to 4,680 without any loss in performance.
The continual innovation by the firm in its pursuit of efficiency has led the management team to announce the launch of a new series of electric vehicles within the next three years, starting from only $25,000. This would make them the cheapest option worldwide compared to what’s currently available.
Needless to say, being able to offer high-quality vehicles at exceptionally low prices should enable Tesla to secure a large portion of the market share moving forward. And given that the market for electric vehicles is expected to reach $1trn by 2027, the possibility of the Tesla share price moving higher seems entirely plausible.
The bear case against the Tesla share price
As promising as this progress and future potential sounds, some genuine concerns are starting to mount against the company. The competition is beginning to apply significant pressure, especially in China. In a recent report published by the China Passenger Car Association, Tesla seems to be struggling to compete against rival manufacturer NIO.
Meanwhile, other established car manufacturers are also starting to move into the electric vehicle space. This shift has been somewhat accelerated by the introduction of new legislation. For example, here in the UK, the sale of new petrol and diesel cars will be banned in 2030.
With more competition to fend off, the Tesla share price might struggle to maintain its growth. The prospect of a $25,000 electric vehicle is bound to help in this matter. But this may not be sufficient to meet existing shareholder expectations.
The bottom line
While I can’t deny the electric vehicle market is an enormous opportunity, Tesla’s valuation still looks too rich for my tastes.
So far, the company has managed to operate in a relatively competition-free environment. But the recent performance in China might be a sign of what’s to come as more competitors enter the arena in western markets. And so, for now, I’m keeping Tesla on my watchlist until the share price looks more justified in my eyes.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.