I had a text exchange with a friend yesterday who asked, “Is now the time to jump back in on Tesla [stock]?” My response was that I could not say with any confidence whether Tesla’s share price would rise or fall from Tuesday’s level, which was down over 50% since mid-December. (Note: Tesla’s share price rose nearly 8% on Wednesday.) However, even at that depressed price, Tesla was still valued at $800 billion—2.5 times the valuation of Toyota.
Tesla bulls will argue that Tesla isn’t a car company and, therefore, should not be compared to traditional automakers like Toyota. Long-time Tesla investor Ron Baron remains highly bullish, recently telling CNBC that he expects Tesla’s market cap to quadruple over the next 10 years. Baron sees robotaxis as a game-changing shift that will allow Tesla’s autonomous vehicles to generate 50,000 revenue miles per year, capturing $50,000 in profit per vehicle annually.
Before you jump on the Baron-induced Tesla train, however, you must recognize that Baron’s investment return on Tesla is around sixteen-fold. But remember, he has owned Tesla since 2014. Short-term fluctuations in Tesla’s share price—like the recent 50% decline—are practically irrelevant to him.
Howard Marks of Oaktree Capital Management once said, “When you buy a stock, you buy a share of the company’s earnings every year into the future.” Thus, if a stock’s price-to-earnings ratio (P/E) is 15, it means you’re paying for 15 years’ worth of earnings at its current price.
If Tesla is truly a technology company, consider that the P/E ratios of six of the Magnificent 7 tech stocks range from 21 to 58. The seventh Magnificent 7 company—Tesla—has a P/E ratio of a staggering 122!
Tesla’s P/E reminds me of another Marks quote on valuation: “No asset is so good it can’t be overpriced.” This sentiment aligns with Warren Buffett’s well-known observation: “Price is what you pay, value is what you get.” A great company bought at a poor valuation may underperform a mediocre company bought at a great valuation. And I can make a reasonable argument that Tesla isn’t even a great company—yet.
Disclosure:
I do not own any shares of Tesla, having liquidated my position in 2022. However, I do own shares in Nvidia, Alphabet, and Apple—three of the Magnificent 7 companies.
Disclaimer:
TaaSMaster, LLC is not a registered investment advisor or broker/dealer. All investment opinions expressed by TaaSMaster, LLC are based on personal research and experience and are intended as educational material. While best efforts are made to ensure that all information is accurate and up to date, occasional unintended errors may occur.