Tesla (NASDAQ: TSLA) shares rose in pre-market trading after Elon Musk sold almost $4bn of his stock. Filings to the US Securities and Exchange Commission showed the EV maker’s chief executive sold a total of 4.4 million Tesla shares on Tuesday and Wednesday. While the stock initially fell in after-hours trading, it has since recovered, perhaps due to him selling less stock than anticipated and a tweet saying he wouldn’t be selling more. It was assumed that the sale of Tesla stock would be used in part to fund his takeover of social media giant Twitter.
There are several reasons why the market might be concerned about Musk’s sale. Firstly, using Tesla shares to finance a Twitter buyout could suggest he believes Twitter to have more potential and value. Equally, some analysts have suggested Musk might now be preoccupied with Twitter and take his eye off Tesla. Dan Ives, managing director of Los Angeles-based Wedbush Securities, suggested the Twitter deal was an “albatross” for Tesla.
So, should I be avoiding Tesla stock?
Is it cheap?
Ok, I’ve considered Tesla to be overvalued for a while. And I’m not on my own. In late 2021, David Trainer, CEO of investment-research firm New Constructs, said he thought the EV maker was overvalued by roughly $1trn. The stock had just passed the $1trn level.
One reason for this is that in a record-breaking 2021, Tesla reported revenues of just $53.8bn, leading to adjusted EBITDA of $11.6bn and net income of $5.5bn. Personally, I think that’s a long way off a company that’s worth around $1trn.
I appreciate the counter argument is that Tesla’s revenue growth has been impressive. Tesla has increased its revenue by 668.9% over the past five year, moving from US$7bn in December 2016 to US$53.8bn in December 2021.
In the short term, I think maintaining that growth level will be difficult given the current supply chain issues, but in the long run, there’s another factor that concern me more. I think competition from established car brands will be a big challenge for Tesla going forward. Mercedes has recently demonstrated the capacity of its concept car, travelling over 1,000km on one battery. Meanwhile, other brands have substantially cheaper offerings. MG’s ZS EV has a 280-mile-range and loads of tech. What’s more, it only costs £28,000. That’s £20,000 less than the cheapest Tesla.
Will I be buying Tesla stock any time soon?
Of course, I could be wrong on Tesla. The EV maker has a strong product, it’s US-made (which for some is a mark of quality), and its seen as a pioneer in the area. There’s also increasing demand for electric cars given rising fuel prices and a consumer move towards being more environmentally-friendly.
However, I’m not planning to buy Tesla stock any time soon. I think this stock is considerably overvalued and I feel it’s unlikely to continue growing at the rates we’ve seen over the past five years.