Tesla (NASDAQ: TSLA) shares are off more than 20% from their highs. While Tesla shares traded for around $880 near the beginning of the year, they closed at $640.39 per share on 25 March. Is the recent dip an opportunity? Given the decline, here’s what I would do.
Tesla’s the market leader right now
To me, there is no question that Tesla’s the market leader in electric vehicles (EV) right now.
Given the company’s head start versus other major automakers, Tesla has substantial market share in the sector. According to some estimates, Tesla had around 80% market share in the US EV market in the first half of 2020. Tesla also has substantial EV market share in China and Europe too. With that market share, Tesla has more scale and can produce batteries that are cheaper than many competitors. With cheaper batteries, Tesla can sell EVs at more competitive prices and potentially gain even more scale.
The EV sector itself is attractive given the expected growth in the industry thanks to government mandates and more competitive prices. According to some estimates, the market for electric vehicles could grow to $803bn by 2027 from $162bn in 2019.
Tesla also has some other key advantages in electric vehicles. Tesla’s Elon Musk is a great CEO in my view given how he has been able to achieve so much despite all the challenges. With its higher market cap, Tesla can also potentially afford to hire more of Silicon Valley’s best and brightest to develop products. In the future, Elon Musk can potentially use Tesla’s market cap to buy companies with promising technologies that could help it grow faster as well.
What I’d do
While Tesla is the current leader and has a lot of advantages, Tesla will have a lot of competition in the future. Companies like Volkswagen and GM are taking EVs very seriously, with Volkswagen investing substantial capital to try to catch up and even surpass Tesla at some point. In autonomous driving, other companies that have more financial resources than Tesla such as Alphabet are also competitors.
Tesla’s valuation is also still very high. Elon Musk himself said that the stock was ‘too high’ in May of last year when the stock traded for around $780 per share. This was before Tesla did a five-for-one split in August 2020, so Musk was referring to a price of around $156 per share based on the current share count.
Whether Tesla shares offer value at the current prices depends on how well the company does in the future. Although I don’t think Tesla will have 80% market share in 10 years, I think the company will be among the leaders. Whether that’s enough to justify the present valuation or to increase it, I’m not really sure.
All in all, I like Tesla’s attributes and I think it has great potential, but I feel Tesla shares are too richly valued given its current operations. While I might change my mind in the future if certain favorable developments were to occur, I have Tesla on my ‘watchlist’ instead.