In just five years Tesla (NASDAQ: TSLA) from what Wall Street had written off, turned into her favorite. During this period, Tesla shares soared from about $ 40 to a record high of $ 900 in January – 20 times their share. Amazon, Apple, as well as Alphabet…
But Tesla has since lost nearly a third of its market value. Stocks are under downward pressure as traders shift from high-growth bets to revolving games like banks. Neither did the recent negative headlines about Tesla’s China sales and vehicle recalls.
Investors who missed the chance last year, when Tesla surged over 700%, may wonder if it’s time to buy the dip. Let’s look at the bull and bear cases for Tesla before making a buying decision.
The case of the bull
Tesla has been unprofitable for most of its 18-year existence. That all changed last year when Tesla reported its first annual profit on the back of 28% revenue growth. To get there, Tesla sold nearly half a million vehicles – more than ever.
While 2020 has been a successful year, Tesla believes 2021 will be even better. And so far it has been. In the first quarter of 2021, Tesla set new records for vehicle production and shipments. Revenue increased 74% year-on-year, and net income rose 2,638%.
When it comes to Tesla, it’s important to see the big picture. The company may be a leader in electric vehicles (EV), but its share of the global automotive market is still very small. In comparison, car manufacturers sell 70 to 80 million new cars worldwide every year. Tesla sold nearly 500,000 vehicles in 2020, which means a market share of less than 1%.
While electric cars are a seemingly unstoppable trend right now, most modern cars still run on internal combustion engines (ICEs). As a leader in this industry, Tesla is determined to combat the tailwind of electric vehicles by ramping up production for years to come. Even if Tesla increased its sales 10 times, its market share would still be less than 10%.
In addition to the automotive industry, Tesla is positioning itself as a leader in emerging industries such as driver services and autonomous vehicles. While it’s still early days for these businesses, Tesla fans believe the company has a strong chance of success. For example, Tesla has used its global on-road vehicle fleet to collect billions of miles of driving data, helping to improve its autonomous driving technologies. In fact, as of March 2020, Tesla has collected 3 billion miles of data – 150 times more than the 20 million miles of data collected Alphabet Weimo.
Add to that CEO Elon Musk’s incredible track record as an entrepreneur, and the bulls believe they have good reason to keep Tesla growing at a fast pace.
Initially, the Tesla bears argued that electric vehicles would struggle to become mainstream. This, in turn, spawned the narrative that Tesla could never sell enough cars to make a profit. Tesla has not only proven them wrong, but may have started the ongoing electric car revolution.
Ironically, Tesla’s success could ruin her. Legacy car makers such as General Motors (NYSE: GM), Ford (NYSE: F), as well as Volkswagen (OTC: VWAGY) are investing billions in electric car production, aiming to surpass Tesla in their game. As a growing number of reputable automakers tap into electric vehicles, Tesla risks losing its pioneering advantage. After all, these companies have years of experience in the manufacture and sale of automobiles. In China, Tesla confronts a longtime rival BYD and EV upstart like Nio as well as Xpeng… These companies are investing heavily in increasing their market share and some of them may be better positioned to meet the needs of Chinese consumers.
Apart from electric vehicles, Tesla is also facing intense competition in the autonomous vehicle industry. For example, earlier in March, Honda launched a new car that has the world’s first certified (by the Japanese government) Level 3 autonomous driving technology, and Mercedes-Benz is set to launch its own Level 3 autonomous vehicle by the end of this year. While these latecomers may not have much autonomous driving data (compared to Tesla), they remain formidable contenders in this autonomous driving race. What’s more, it could also indicate that Tesla’s early stage advantage (including data advantage) is probably not that big. After all, Tesla’s autonomous driving system is only certified by regulators as a Level 2 autonomous product.
The Bears also noted that Tesla’s estimates seem out of touch with the real world. At $ 572, Tesla is trading 17.6 times its sales. This is ridiculously expensive, especially when you consider that General Motors is trading at less than 1X sales.
In other words, investors have assessed Tesla’s potential for success in the existing EV business – just like your new business. Thus, buying Tesla shares is currently a risky business as we do not know if these ventures will ever be successful.
Buy Tesla Now?
As a pioneering electric vehicle manufacturer, Tesla has tremendous growth opportunities in the automotive industry. It is also being introduced into exciting industries such as autonomous driving, car travel, and renewable energies. On top of that, Tesla is led by Elon Musk – arguably one of the best entrepreneurs of our time.
But with competition growing from multiple fronts, Tesla faces a tough battle to maintain its market share. His new ventures will go down the beaten track with unknown chances of success.
For me, however, Tesla’s real problem is its sky-high valuation. Even after losing nearly 40% of its value, Tesla is trading at 486x profit in 12 months. If Tesla falls short of the market’s high expectations, investors may stop rewarding it with such a premium rating. On top of that, any bad news related to Tesla could send the company’s stock to the ground.
In general, investors should wait for a better entry point before buying a stock.
This article represents the opinion of an author who may disagree with the “official” recommendation position of Motley Fool’s premium consulting service. We are colorful! Bidding on an investment thesis – even our own – helps us all to be critical about investing and make decisions that help us become smarter, happier, and richer.