I’m definitely glad I didn’t purchase Tesla (NASDAQ: TSLA) inventory at its excessive level in December. In underneath three months, it has crashed by 50%.
Nonetheless, that leaves the automobile maker with a market capitalisation of $754bn, in comparison with $38bn for Ford and $47bn for Normal Motors.
So, does Tesla doubtlessly nonetheless have lots 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 far more (or much less) than it’s actually price for a surprisingly very long time in some instances. However, eventually, actuality often bites. Sometimes, the valuation hole between what the corporate is price and what it sells for is then diminished, or closes altogether.
So, is Tesla price $754bn, not to mention a better quantity?
Final yr, Tesla generated internet revenue of $7bn. However the prior yr it had been $15bn. At that increased stage, the present price-to-earnings (P/E) ratio could be 50. That appears excessive to me and is nicely above what I’d pay.
Taking the long-term view
Nonetheless, looking throughout the subsequent 5 to 10 years as a long-term investor, what if earnings don’t solely get again to the 2023 stage however surpass it?
Causes for that might embody increased automobile gross sales attributable to 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 might additionally assist.
Even doubling 2023 income over the subsequent 5 years, although, the possible P/E ratio on the present inventory worth continues to be 25.
For Tesla inventory to double from right here, I feel it could want some extra earnings fillip. That could possibly be from certainly one of its new enterprise initiatives (like self-driving taxis) considerably outperforming expectations.
Issues may worsen
That may conceivably occur.
The Tesla inventory worth has lengthy moved in pretty wild methods and is up 563% over the previous 5 years regardless of its current crash.
However Tesla has a chequered observe report on the subject of delivering new initiatives something near on time.
In the meantime, earnings didn’t halve final yr for no motive. Elevated competitors within the electrical car area has meant pricing stress, resulting in decrease revenue margins. That would change because the market matures, or decrease margins may merely turn into a everlasting function.
On prime of that, car tax credit in markets together with the US might wind down. Towards that backdrop, Tesla might battle simply to get again to 2023 ranges of profitability, not to mention do higher.
However there may be extra.
Its automobile gross sales fell final yr for the primary time. Tariff disputes and boss Elon Musk’s high-profile political interventions are additionally a threat to automobile gross sales volumes (though they do present free publicity of kinds for a enterprise that doesn’t pay to promote).
To me, Tesla inventory nonetheless appears extremely overvalued.
If gross sales appear like they could fall steeply, I count on the share worth to observe. 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.
