Electric car maker Tesla (NASDAQ:TSLA) has been at the forefront of the perfect storm in the EV industry. Tesla stock is up a mind-boggling 757% this year, trading at multiples that are enough to give any investor the creeps. Through effective narrative management, the company has convinced the market of its energy future. The bull argument for the stock is that the company can effectively branch out into other renewable energy areas. Hence, the assumption is that its troubled solar segment and its audacious autonomous vehicle (AV) plans would massively bear fruit. However, at this point, it seems unlikely for Tesla to evolve into an integrated energy company.
Tesla has shrugged off the economic impact of the pandemic with its stellar earning results. The high level of demand in the past quarter has resulted in a shortfall in supply. In an email to its employees, CEO Elon Musk wrote, “We are fortunate to have a high-class problem of demand being quite a bit higher than production this quarter,” Despite its strong results, it’s tough to justify its parabolic stock price.
Meteoric Valuation
The massive growth of EV stocks has been the story this year in the investing world. It’s safe to say that such an exponential jump was hardly anticipated by investors and experts alike. Tesla is arguably the crown jewel of the EV sector, and its stock is up 757% for the year. The table above shows the company’s price metrics, the sector median, and the difference. There is a significant discrepancy between the company’s price metrics and the sector median. For instance, there’s a massive 1573% difference in the price to sales ratio between the company’s price metrics and the sector median. Additionally, the difference between its high and low price targets exceeds its current price. Moreover, Tesla stock is trading at well over its mean price target of $390.
Tesla plans to become a juggernaut of renewable energy on a global scale. The bulls believe that it branches out like Apple (NASDAQ:AAPL) in creating ancillary revenue streams. The company has captured the interests of those believing in the potential of diversification in the sector.
However, so far, it seems that Tesla’s core business resides in its hugely popular automotive segment. The company’s problem is that the margins are slim in the EV business due to the intense competition in the sector. Therefore, it’s tough to see how it could foray into other renewable energy areas without seriously denting its liquidity.
Solar and AV Success Is Up in The Air
Tesla’s Solar and AV technologies are now positioned at the heart of the company’s value proposition. It is spending vast sums of money in advancing development in both fields, but so far, it hasn’t proven to be fruitful.
The company’s solar business has been stagnant for quite some time now. Its third-quarter results showed a significant uptick of megawatts in solar deployments. Quarterly deployments peaked in the fourth quarter of 2015, and its third-quarter deployments are not even 25% of what it achieved then. Tesla has shifted the focus of its solar business off-late towards its much-talked-about solar roof. Though installation volumes and installation ability have improved during the third-quarter, concrete numbers are still not available.
Furthermore, Tesla has talked extensively about its AV technology and its perceived leadership in the area. However, it has consistently failed to deliver on its AV targets. Moreover, according to research firm Guidehouse, the company lags behind many of its tech and automotive peers in its AV technology. Therefore, its perceived leadership in the field is a farce; the claims far exceed its actual capabilities.
Final Word on Tesla Stock
Tesla’s aggressive approach to becoming a renewable energy company is commendable. Judging from Tesla’s lackluster performance so far, it seems that these aspirations might never come to fruition. Tesla is an EV trailblazer and should focus on what it does best. The competition is on its on the company’s heels, and a strategic shift could be detrimental to its long-term success. Unfortunately, the market is buying Tesla’s narrative resulting in its massive stock price. With its current valuation, though, the stock is uninvestable.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article
