I’m definitely glad I didn’t purchase Tesla (NASDAQ: TSLA) inventory at its excessive level in December. In beneath three months, it has crashed by 50%.
Nonetheless, that leaves the automotive maker with a market capitalisation of $754bn, in comparison with $38bn for Ford and $47bn for Common Motors.
So, does Tesla doubtlessly nonetheless have so much additional to fall? Or is that this a possibility for me to purchase Tesla inventory and doubtlessly double my cash if it merely will get again to the place it stood in December?
Valuations can keep inflated for a very long time, however not without end
A share can promote for rather more (or much less) than it’s actually price for a surprisingly very long time in some instances. However, in the end, actuality normally bites. Sometimes, the valuation hole between what the corporate is price and what it sells for is then decreased, or closes altogether.
So, is Tesla price $754bn, not to mention the next quantity?
Final yr, Tesla generated web revenue of $7bn. However the prior yr it had been $15bn. At that larger degree, the present price-to-earnings (P/E) ratio can be 50. That appears excessive to me and is nicely above what I might pay.
Taking the long-term view
Nevertheless, looking throughout the following 5 to 10 years as a long-term investor, what if earnings don’t solely get again to the 2023 degree however surpass it?
Causes for that might embody larger automotive gross sales resulting from new product launches, improved revenue margins because of economies of scale, and in addition contributions from areas like self-driving taxis and robots. In the meantime, the fast-growing energy era enterprise may additionally assist.
Even doubling 2023 income over the following 5 years, although, the possible P/E ratio on the present inventory value remains to be 25.
For Tesla inventory to double from right here, I feel it will want some further earnings fillip. That may very well be from one among its new enterprise initiatives (like self-driving taxis) considerably outperforming expectations.
Issues would possibly worsen
That may conceivably occur.
The Tesla inventory value has lengthy moved in pretty wild methods and is up 563% over the previous 5 years regardless of its latest crash.
However Tesla has a chequered monitor document relating to delivering new initiatives something near on time.
In the meantime, earnings didn’t halve final yr for no motive. Elevated competitors within the electrical automobile house has meant pricing stress, resulting in decrease revenue margins. That would change because the market matures, or decrease margins would possibly merely turn out to be a everlasting function.
On high of that, automobile tax credit in markets together with the US might wind down. Towards that backdrop, Tesla may wrestle simply to get again to 2023 ranges of profitability, not to mention do higher.
However there may be extra.
Its automotive gross sales fell final yr for the primary time. Tariff disputes and boss Elon Musk’s high-profile political interventions are additionally a danger to automotive gross sales volumes (though they do present free publicity of types for a enterprise that doesn’t pay to promote).
To me, Tesla inventory nonetheless appears extremely overvalued.
If gross sales seem like they might fall steeply, I count on the share value to comply with. I reckon one other 50% drop is feasible given how excessive the present P/E ratio is.
For now, I proceed to keep away from the inventory.
