It has been an incredible few years for Tesla (NASDAQ: TSLA). If I had invested £1,000 in the company five years ago, my shareholding would now be worth over £10,000. Over the past year the gain has been much more modest. But the Tesla share price has still moved up by 13%.
Does that mean the great growth opportunities for the shares are now in the rear view mirror? Or could I buy today as a long-term investor and still hope for turbocharged performance in future?
The bull case for Tesla
The share price growth we have seen in the past five years reflects Tesla taking its business to a whole new level in that period. Back in 2016, for example, revenues were $7bn. Last year, they were more than seven times bigger, at $54bn. During that period, the company turned a loss of $645m in 2016 into a profit of $6.5bn by 2021.
That did not happen by chance. The company has been refining its business model dramatically, both in terms of manufacturing and its customer offering. The carmaker continues to scale up its production capabilities, with an enormous new European factory opening earlier this year. The eagerly awaited Cybertruck launch could help expand the customer base with new types of buyer.
Tesla has clearly figured out how to make and sell cars many people want. Over time, as it continues to refine that model, the company ought to be able to improve its profit margins. That could further boost the Tesla share price.
The bear case
However, the excitement has always been about more than one thing. Partly it has been about Tesla specifically. But a lot of it has simply been about explosive growth in the electric vehicle market, with companies like Tesla and NIO benefiting to some extent simply because they are early players in the market.
As the market grows, I expect far stronger competition to emerge from established carmakers. With their vast experience of making and selling cars, that could eat into Tesla’s market share.
On top of that, the company’s future business model remains hard to evaluate. As electric vehicles become more common, the subsidies they currently benefit from in some markets may dry up. That could negatively affect the economics of Tesla’s selling prices.
The share price looks high to me
I continue to see a lot of things to like about Tesla as a business. But as an investment, I do not think it is for me. Its market capitalisation of $770bn looks very high for a company with a limited track record of profitability in an industry notorious for high capital expenditure costs. Tesla’s ambitious expansion plans mean it may incur such costs for years to come.
Meanwhile, both the electric vehicle market and Tesla’s business model are evolving quickly. That could be good for its future profit – but it could also be negative. The Tesla share price lacks the margin of safety I typically look for when I invest. So although I admire the firm, I will not be adding it to my portfolio.