Stock management Tesla (NASDAQ: TSLA) has been a veritable gold mine for some investors. If I had bought Tesla stock in the right place in October, for example, I would now be showing a paper profit 85% – less than three months.
I am a long term investor though. But even here I could do well. A lot well, in fact. In the last five years, the price of Tesla has increased 1,085%.
Unfortunately, I didn’t catch Tesla at the time. So should I buy now – or has the investment case run out of steam?
The business landscape has changed dramatically
Last year Tesla’s annual number of car sales fell, for the first time.
Now, to keep things in perspective, the drop was small. Tesla still turns over tens of thousands of cars every week.
However, a decline in sales growth can be a sign that a company is moving from one stage of development to another, where the focus is less on growing sales volumes and more on increasing profits, for example by raising prices and reducing costs.
But here I see a real risk for Tesla. Last year’s weak sales were not due to the decline in popularity of electric vehicles. The size of the overall market is growing – and I expect it to continue to grow.
Instead, Tesla is in a more competitive market now than it was a few years ago, as many competitors have built up a level to threaten its leading position.
That could lead to more price competition, hurting Tesla’s profit margins. In addition, changes to tax credits in key markets could eat into the American giant’s earnings.
There’s a lot to like about the company
Still, while any savvy investor takes a clear view of potential risks, Tesla isn’t exactly in a bad place.
The car business is big and the company has shown that it has what it takes to succeed in it. Even before becoming game-changers like self-driving taxi fleets, Tesla has carved out a strong and secure niche for itself thanks to its innovative technology and well-known brand.
Furthermore, the company is not a one-trick pony. It has a large and rapidly growing energy storage business.
This strikes me as a smart way to take advantage of other emerging technologies in its electric vehicle business. Over time, I expect energy storage to become a more important part of Tesla’s investment case.
The share price looks overvalued to me
Comparatively, I think there may be some growth left in Tesla business.
But what about stock price?
The company already commands a price-to-earnings ratio of 110. In other words, if someone bought a company at its current valuation, it would take more than a hundred percent of earnings at today’s rates to pay off the cost of that acquisition, even before interest.
That seems too much to me, even allowing for Tesla’s growth prospects, so I have no plans to buy.
Market growth could still drive up Tesla’s price. But based on business fundamentals, I don’t see a logical reason for any such increase at this time.
Conversely, a strong fall would make me more specific in moving the measurement closer to what I see as appropriate.
Source link
