Are Tesla shares a buy after their sharp fall? The Tesla share price has cratered in 2022 and investors may be eyeing Elon Musk’s EV company as a potential bargain.
Tesla has been a favourite among investors positioning themselves in a stock that will benefit from the electric vehicle revolution, and push towards cleaner forms of fuel.
For years Tesla was the only real pure-play EV company and built a loyal base of investors. Tesla shares soared as a result. However, these lofty valuations were tested by traditional manufacturers entering the EV market in a big way, and Tesla shares very quickly looked expensive around $400. A global monetary policy tightening cycle meant their frothy valuation was no longer sustainable.
With Tesla shares more than halving since, the focus should now be on whether the current valuation is justified by Tesla’s earnings.
Tesla sales
Tesla is no longer a company that should be priced on what it may do years into the future. The company operates in a developed EV market which accounts for 17.8% of new car registrations in Europe, 22% of cars sold in China in October were electric.
Although Tesla is top selling EV brand globally, Tesla is not the top selling EV brand in China, the world’s largest auto market.
Tesla have been around long enough to establish a foothold in the market and should be judged by current sales activities. Year-on-year revenue growth of 56% in the third quarter is impressive, but significantly below the 80% growth recorded a couple of quarters ago.
Traditional car manufacturers – and new entrants – are materially increasing their EV sales and rapidly stealing Tesla’s market share.
Indeed, the extensive ranges of EVs manufactured by traditional car companies means it is also appropriate to make valuation comparisons to peers such as BMW, Volkswagen and Toyota.
Tesla shares valuation
Volkswagen trades at 3.7x earnings, BMW at 3.1x and General Motors 5.9x. A very basic comparison to peers makes Tesla shares trading at $180 and 50x earnings seem expensive.
There is an argument Tesla’s premium is justified by their push into gigafactories, but it’s hard to justify the extent of the disconnect in valuations.
Tesla is a fantastic company, but Tesla shares will need to fall further, or see their sales increase dramatically, to become attractive.