There is no denying that Tesla (NASDAQ: TSLA) is one of the most popular stocks around. It routinely appears among the most traded stocks in the UK. But I think it is worth asking if the party might be slowing down for the electric vehicle (EV) stock now.
Tesla stock price performance
Consider this. It is down some 6.5% in the past month as I write this Monday afternoon. And its performance over the past year it is not too impressive either. The stock rose only 11% or so. Of course this point-to-point comparison obscures the fact that at one time during the past year, the stock rallied significantly. But it did fall fast too.
Steep valuations
I think it could continue falling, in fact. When I last wrote about the stock, admittedly a while ago in April last year, it had a price-to-earnings (P/E) ratio of an unbelievable 1,187 times. While P/E is not the only factor to consider when buying a stock, this was one of the deterrents for me when contemplating buying Tesla.
The stock’s tepid share price growth over the past year is also a sign that the Tesla share price had risen a bit too much since the November 2020 stock market rally. Interestingly, the company’s earnings have been robust in the meantime. In the third quarter of 2021, the latest period for which numbers are available, its net income rose by 4.5 times from the same time the year before. Optimism about the stock, it appears, is not rising with better performance or with the bettering prospects of EVs. In fact, its P/E has declined to a far lower 323 times.
Peers priced competitively
But even this is very high compared to the market valuations of its competitors. For instance, companies like General Motors and Ford Motor Company are committed to growing their EV presence. Unlike Tesla however, they are trading at P/Es of 7 times and 30 times, respectively. Of course their product profiles are different, which explains some of the difference in valuations. I cannot look away from the fact that they are strong brands that could give Tesla stiff competition in the near future, however.
If Tesla’s earnings ratio were to come-off closer to that of Ford, that would mean that its share price would have to fall 10 times from here! This sounds impossible, but I assure you it is not. In January 2020, before the pandemic started, it was exactly at these levels. The EV rally really only started a little over a year ago.
What I’d do
Just based on these numbers, I am still quite convinced that Tesla shares are not for me as long-term investor right now. Its earnings report is expected to show bettering performance, but if its stock rallies then I reckon it would be only for a short time. I am just staying away from it.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
