Electric vehicle company Tesla (NASDAQ: TSLA) has seen its shares fall steeply in 2022. The Tesla stock price is down just over 40% since the turn of the year, although it is still 3% higher than it was one year ago. After this latest pullback, is now the time for me to start buying Tesla for my portfolio?
Reasons why Tesla stock is falling
This year has been a challenging one for Tesla, partly because the stock has been caught in the sell-off of tech shares. But the share price tumble also reflects some factors specific to the carmaker, in my opinion.
One of them is growing competition. Established carmakers have been getting serious about their electric vehicle ambitions and clearly have Tesla in their sights. This week, for example, the chief executive of Volkswagen said that it expects to narrow the sales gap with its American rival this year and then overtake it in 2025.
In itself, more competition might not be bad for Tesla, in my opinion. More electric cars on the road could create better facilities for them, like new charging points. That could help Tesla. If the total market size grows, it could keep increasing sales even if it loses market share to rivals like VW and NIO.
Tesla’s CEO was also reported as saying that its ambitious factory building programme is costing it billions of dollars. Supply chain problems and lockdowns in countries like China – where it has a factory – mean Tesla has been spending heavily on new manufacturing capacity. But its output has not been rising as fast as expected.
Emerging market
I do not think the heavy capital expenditure is wrong. Carmaking is a capital-intensive industry and it is common for automakers to spend heavily on factories before they can start to sell cars made there.
I do think a lot rides on the ambitious expansion plan of building multiple massive new factories in different regions over just a few years. It could burden the balance sheet just as sales competition and a recession in many markets make it harder to shift cars. Then again, it is a bold move that is typical of the ambitious approach that has delivered dramatic growth so far.
I think the market for electric vehicles is likely to grow significantly in coming years. Tesla may face more competition, but it has built a strong brand and reputation for its EVs. Over time I think it can maintain a powerful position in the market. That could help it deliver large revenues and profits.
My move on Tesla stock
Despite that, I am not ready to buy the stock for my portfolio just yet.
Even after the shares fell, the market capitalisation of $764bn looks hefty for a company that last year made profits of $5.5bn. Tesla has only become profitable in recent years. It could be that earnings keep growing quickly, as they did last year. But they may not, given heavy capital expenditure, tightening competition and a worsening economy in key markets.
Tesla stock still does not look like good value to me. I will not be adding it to my portfolio.