This year marks the 15th anniversary of Tesla (NASDAQ: TSLA) on the stock market. Throughout this period, the stock has faced an ongoing struggle between skeptics predicting a downturn and enthusiasts believing the long-term investment potential isn’t fully reflected in its current price.
This dynamic continues to be relevant.
Over the past five years, Tesla’s stock has surged by 808%, with an impressive 84% rise since late October.
However, with a market capitalization of $1.2 trillion and a price-to-earnings (P/E) ratio of 108, Tesla’s valuation seems to incorporate a significant amount of growth potential, yet it could still be perceived as overvalued.
I find the company’s future prospects promising, as its strong brand, proprietary technology, and extensive customer base are likely to lead to sustained commercial success.
But is it worth investing in Tesla stock at such a lofty valuation?
Three potential factors for an increased valuation
The answer depends on my expectations for the company’s performance in the coming years and decades.
I see a few potential catalysts that could drive Tesla’s stock even higher.
One factor, which we’ve witnessed frequently (as evidenced by the recent surge since October!), is momentum. Stock market investors, fearing they might miss out, often flock to Tesla shares, driving the price upwards.
Nonetheless, I’m not inclined towards this momentum-driven strategy, as I view it as more speculative than investment-focused. I prefer to base my investment decisions on the underlying business fundamentals.
Transformative business potential
Could the fundamentals substantiate a higher price?
I believe the answer may well be yes.
One potential catalyst is significantly improved earnings. Although Tesla’s electric vehicle sales volumes dipped slightly last year, the company has a track record of revenue growth and possesses the capabilities to continue this trajectory, especially through the introduction of new models.
Additionally, economies of scale play a crucial role in automotive manufacturing (no pun intended).
Tesla’s robust sales performance could enhance profit margins in the coming years by reducing costs and offering high-margin add-ons. However, an emerging risk is that increasing competition in the electric vehicle sector may force the company to compete more rigorously on price, which could negatively impact margins.
Another growth driver lies outside the automotive sector.
The energy storage division is already thriving. Furthermore, Tesla may explore new product lines, such as autonomous taxi services and commercial applications leveraging its extensive customer journey data.
If revenue from these sectors enhances earnings, it could lead to a significant increase in Tesla’s stock price.
At a P/E ratio of 108, the numbers speak for themselves
However, much of this seems rather speculative at this moment.
Simultaneously, Tesla’s P/E ratio in the triple digits feels uncomfortably high for me as a potential investor.
Considering various risks, such as intensifying competition and potential changes in tax credit policies in the U.S. and other regions, does it make sense for Tesla stock to be valued at more than a century’s worth of earnings at its current value?
I don’t believe it does.
This appears to be a valuation more suited for speculators than informed investors. Thus, I do not intend to add Tesla to my portfolio.
