Tesla (NASDAQ:TSLA) shares are down 27% since mid-April. The current downward trend represents one of the longest and steepest falls in the Tesla share price. However, there has been plenty of volatility over the past 12 months, and the trend had been broadly upwards. Tesla has hit some considerable heights, taking its market cap above the $1trn mark.
Despite the recent fall, Elon Musk’s EV company is still valued at $800bn. I’ve long contended that Tesla is overvalued, and I still believe this. This has been further reinforced by the falling share price of other EV makers, such as NIO and Rivian. Both companies are down massively in 2022 alone. NIO, a favourite of mine, is down 55% and looks like a much more attractive proposition for my portfolio. Rivian has fallen even more.
Some analysts have suggested Tesla’s share price explosion over the last three years is something of a bubble. By this, they mean that the share price vastly exceed the fundamental value of the company. I agree with this assessment. I appreciate that Tesla is valued on future performance, but it still trades considerably higher than the company’s fundamental value.
So, what’s the reason for the share price fall and has the Tesla bubble burst?
What’s behind the recent fall?
For a start, 2022 has seen investors move away from growth stocks like Tesla towards value stocks. Amid the current levels of inflation and higher interest rates, investors want returns soon rather than later so have favoured profit-making and dividend-paying stocks. In a similar vein, higher interest rates increase the cost of growth.
The share price also appears to have been negatively impacted by Musk’s sale of some Tesla shares to fund his Twitter takeover. In theory, selling one to buy the other, suggests that the latter is a better value proposition.
In addition, Tesla’s Shanghai factory hasn’t been operating at full capacity due to Covid-19 lockdowns.
Has the bubble burst?
So has the bubble actually burst? In my opinion, no. Not yet anyway. It’s still hugely overvalued. Tesla reported revenues of just $53.8bn, leading to adjusted EBITDA of $11.6bn and net income of $5.5bn. The stock has a price-to-earnings (P/E) ratio of around 100 based on the past 12 months and its price-to-sales (P/S) ratio is around 13.
The P/E ratio makes it one of the most expensive companies out there, although I appreciate it’s on a steep growth curve. Meanwhile, its P/S ratio is very high compared with my favourite EV firm, NIO. NIO has a P/S ratio of around 4 and appears to be on a growth curve similar to Tesla. The big difference is that NIO is valued around $22bn.
While I’m impressive by Tesla growth in recent years, and its cars are excellent, I still think this EV maker is vastly overvalued.
Here’s what I’m doing
I’m certainly not buying Tesla shares. In fact, I’ve bought shares in competitor NIO. I think the Chinese firm has excellent prospects, although there might be some short-term pain caused by China’s lockdowns. Like Tesla, NIO also has an impressive range of highly rated EVs.