Quick, name a company that makes electric vehicles… Did you immediately think of Tesla (LSE: TSLA)? It’s certainly leading the way, though a good number of other car makers are getting in on the act. The Tesla share price echoes that leadership, up 130% over the past 12 months.
But it’s suffered some weakness in 2021. The stock came off a high of $900 in January and has declined around 30% since then. That price fall alone might be a good reason to buy. But that’s not the reason I have in mind. No, my reason is Elon Musk. He seems to have the power to affect stock prices, Bitcoin, or whatever, with just a tweet. But that’s not what I mean.
No, Musk is a genuine pioneer. To me, that’s someone who’s prepared to have an idea and just go for it. And I think the Tesla share price success reflects investors’ confidence in him personally, as much as in the company and its products.
The buying public surely equate Tesla with Musk too, don’t they? And that makes them want to identify with him and with the brand. I mean, could you imagine Ford or General Motors inspiring anyone to spend good money on one of their fancy new electric cars, and then take a welding torch to it and turn it into a pickup truck?
Will the pioneers win?
At this point, I do have to remind myself of something Warren Buffett has pointed out. It wasn’t the pioneers of aviation who made all the money. It was the companies coming after on the back of their inventions. Does that say anything about the current Tesla share price?
Well, it brings me to the reason I might sell if I owned any Tesla stock. It’s that thing called valuation. Tesla shares are on a trailing P/E of, what was it now? Oh yes, about 630. I could understand investors who might run for the hills when they see a valuation like that.
But then I remember the early days of Amazon, and the astronomical P/E multiples we were seeing back then. Yet investors who bought those apparently overvalued shares will be sitting pretty today. Amazon was a pioneer in its field too. And it’s a field in which plenty of others have since ventured. Get a warehouse and sell stuff online from it. Easy, right? Well, Amazon’s still leading the way.
Tesla share price: is it too high?
Against that, I’m reminded that I lived through the dot com bubble. That brief period saw a whole load of shares pushed to Amazonian valuations and beyond. And most of them crashed right back, some losing 90% and more from their peak. I really hope that doesn’t happen to the Tesla share price.
Tesla’s business is growing strongly. In Q2, the company shipped 201,250 vehicles, compared to 90,650 in the same quarter last year. If it can keep that up, how soon might that P/E start to fall?
So will I buy? I don’t know. I just can’t reconcile my bullishness about Tesla’s growth potential with that monumental valuation. I’ll keep watching for now…