Own shares in tesla (NASDAQ: TSLA) has been a real gold mine for some investors. If you had bought Tesla stock at the right time in October, for example, you would now be showing a paper profit of 85% – in less than three months.
Although I am a long-term investor. But I could have done well here too. Very well, actually. In the last five years, the price of Tesla has skyrocketed 1.085%.
Unfortunately, I didn't own a Tesla during that period. So should you buy now, or has the investment case run out of growth potential?
The business environment has changed a lot
Last year, for the first time, Tesla's annual vehicle sales number fell.
Now, to keep things in perspective, the drop was small. Tesla still moves tens of thousands of vehicles each week.
However, a reversal in sales growth may be a sign that a company is moving from one stage of development to another, where the focus is less on increasing sales volumes and more on increasing profitability, e.g. , increasing prices and reducing costs.
But I see some real risks for Tesla here. Last year's weaker sales weren't because electric vehicles are losing popularity. The overall size of the market is growing and I expect it to continue to grow.
Rather, Tesla now finds itself in a much more competitive market than it was a few years ago, as multiple rivals have built scale to threaten its leadership position.
That could lead to greater price competition, hurting Tesla's profit margins. On top of that, changes to tax credits in key markets could also affect the US giant's profits.
There is a lot to love about the company.
Still, while any smart investor has a clear view of the potential risks, Tesla isn't exactly in a bad situation.
The vehicle business is important and the company has shown that it has what it takes to be successful in it. Even before potential game-changers like self-driving taxi fleets, Tesla has carved out a strong, defensible niche thanks to its innovative technology and well-known brand.
On top of that, the company is not limited to just one trick. It has a large and rapidly growing energy storage business.
This strikes me as a smart way to capitalize on some of the expertise it is developing in its electric vehicle business. Over time, I expect energy storage to become a much bigger part of Tesla's investment case.
The share price seems overvalued to me.
So, all in all, I think there could very well be growth left in Tesla. business.
But what about the stock price?
The company already has a price-earnings ratio of 110. In other words, if someone were to buy the company at its current valuation, it would take more than a century of earnings at the current level to pay off the cost of that acquisition, even before interest .
That seems very overvalued to me, even taking into account Tesla's growth prospects, so I have no plans to buy.
Market momentum could still push up Tesla's price. But based on business fundamentals, I don't see any rational reason for such an increase at this time.
On the contrary, a sharp drop would seem more understandable to me, since it would bring the valuation closer to what I consider justifiable.
