One thing is clear regarding Tesla (NASDAQ:TSLA) as 2021 kicks off: a lot of pundits are willing to at least accede to the idea that the laws of gravity also apply to Tesla stock. Based on what I’ve been reading, it feels like many folks in the markets expect TSLA shares to experience a correction relatively soon.
Of course, it’s hard not to agree with that argument, especially given that TSLA currently marches on a trailing price-earning ratio above 1,500. Speculators who look at other car manufacturers like Ford (NYSE:F) or Toyota (NYSE:TM) have to simply shake their heads and ask what makes Tesla so different? After all, a Ford or a Toyota aren’t that different from one of Tesla’s cars when it truly comes down to it.
So, like many of my other colleagues at InvestorPlace, I have to concede the point: now is probably not the time to buy TSLA stock.
Tesla Stock in Strange Times
The year 2020 will be remembered as a strange one indeed. For one, headlines were dominated by the pandemic as well as all the economic difficulties it caused and, more importantly, the human toll it took.
But, it’s also extremely important to look for the good in times like these, wherever it can be found. In business, one of the greatest stories of 2020 was the ascent of Tesla. That’s because the electric vehicle (EV) leader cemented its place as a dominant name in the space — and perhaps in the automotive industry at large.
However, a lot about Tesla’s rise has left the markets scratching their heads. Frankly, it’s difficult to understand how Tesla stock seems to continually outperform those who should be considered its peers. How can that be the case?
Sales Don’t Explain It
It may seem strange to readers that Tesla, which sold just short of half a million vehicles in 2020, should warrant a market capitalization above $802 billion. That number may not seem outlandish taken on its own. But compare that to Toyota, which sold 10.7 million vehicles in 2019 and looks to have sold more in 2020. That’s roughly 20 times as many sales, yet TM maintains a market cap of about one quarter of Tesla’s.
So, the real question remains — what makes TSLA so different and justifies the outlandish metrics that it enjoys? Surely, it is a pioneering force with an enigmatic leader and it produces products that lead the world into a new paradigm. But that doesn’t fully explain why it’s so pricey.
I certainly can’t explain what makes it such a strong stock. That said, I also can’t explain why it should experience a selloff other than the fact that it simply is too expensive. All I can say is that there seems to be a rising tide of sentiment that Tesla stock has to cool.
Yet Tesla Has Momentum
But Tesla has momentum on its side. For one, the company just had its best sales quarter. That should make it more difficult for markets to drive the Tesla stock price down despite the general uneasiness with its valuation. Further, Tesla is seeing high demand in China, the biggest EV market in the world.
Maybe the only thing that could dampen the parade is competition. In fact, consumers and market pundits continue to express the idea that 2021 won’t be as kind to Tesla because new EV entrants will begin to erode its market position. However, what I’ve yet to understand is which ones, exactly, will be the EVs to do so?
Undoubtedly, there will be new vehicles coming out from many of the blank-check-company-funded EV manufacturers now on the market. There will also be some competition from legacy automakers as they electrify. But in my mind, there is currently nothing even remotely compelling enough to really threaten Tesla’s dominance.
In my opinion, the only thing that has changed about Tesla stock as we enter 2021 is that the voices questioning its price are getting slightly louder. Of course, the company is still an enigma which defies description in normal business terms. What’s more, I also question its valuation and will continue to.
But, I am also starting to believe that Tesla may simply maintain this high valuation moving forward. It’s still the leader. It also keeps setting new sales records and is doing the same in China. So, despite the recent calls for more market rationality, I’m not betting against this name.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.