It is less than three months since the year started (although it may seem a lot longer!). During that time, though, Tesla (NASDAQ: TSLA) has fallen by almost a fifth. Buying Tesla stock now is 19% cheaper than it was when the year began.
Should I do so?
A business with long-term proven performance
It is easy not to be surprised that Tesla stock is tumbling, as the company has had multiple challenges in recent years – and I will come to that in a moment.
But the reality is that, even after the recent share price slide, Tesla’s long-term performance has been positive.
Tesla stock is 34% higher over the past year alone. That comfortably outpaces the 13% gain seen in the S&P 500 index during that time.
Over five years, Tesla is up 78%.
For someone who bought Tesla stock when it first started trading in 2010, the gain has been even better: a phenomenal 28,638%.
Now, it goes without saying that past performance is not necessarily a guide to what to expect in future.
But since there is never a shortage of people willing to offer a critical view of the Tesla investment case, I think it is worth remembering that the company, currently commanding a $1.1trn market capitalisation, has been responsible for some serious value creation.
Tesla’s at a crossroads
Why, then, has Tesla stock tumbled lately?
As I see it, the decline reflects uncertainty about where the company might go from here.
One way to value it is based on its current business. While it has a power generation and storage business that is doing well, Tesla’s bread and butter is its car business.
Its car sales volumes have fallen for two years in a row. By eliminating some models from its already limited lineup, I think it could lose more potential sales.
Meanwhile, rivals like BYD have been taking share in many markets (it now outsells Tesla worldwide). The end of key tax credits in the US has negatively transformed the economics of Tesla’s car business.
Putting all that together, I do not see a justification for a market cap anything close to $1.1trn.
Clearly, though, some investors do, hence the current market capitalisation. Rather than focussing on the existing business, their investment case is largely about the road ahead.
Lots to prove – and no guarantee of success
That road ahead does sound like it is full of potential, from self-driving taxis to robotics.
Tesla’s history has demonstrated that it can bring innovative technology to market at scale in a short timeframe. Add to that some of its other existing capabilities, from autonomous driving software to manufacturing, and Tesla clearly has a strong opportunity to do well in such emerging fields.
But – crucially, in my view – so do other companies. A lot of other companies.
In fact, many firms have already made greater strides, both in self-driving vehicles (BYD is one of them) and robotics.
Tesla’s ambitions at this point are relatively early stage. They are a long way from commercialisation at scale – and may never get there.
Even after the stock price fall, though, Tesla looks priced for massive success. I think it is overvalued, so will not be investing.
Fortunately, there are other tech stocks that I think currently offer much better potential value…
