In just five years, Tesla (TSLA 5.30%) went from being written off by Wall Street to becoming its darling. Over that period, Tesla shares soared from about $40 to an all-time high of $900 in January -- a twentyfold gain that's outpaced the likes of AmazonApple, and Alphabet.

But since then, Tesla has shed nearly over a third of its market value. The stock is seeing downward pressure as traders rotate from high-growth tech bets and into reopening plays such as banks. And a recent slew of negative headlines regarding Tesla's sales in China and vehicle recalls hasn't helped, either.

Investors who missed the boat last year -- when Tesla rallied over 700% -- may be wondering if it's time to buy the dip. Let's run over the bull and bear cases for Tesla before deciding whether to buy.

A young person is thinking while holding a pen and looking to the side.

Image source: Getty Images.

The bull case

For most of its 18-year existence, Tesla has been unprofitable. That all changed last year when Tesla reported its first-ever annual profit on the back of a 28%  rise in revenue. To get there, Tesla sold almost half a million vehicles -- the most ever.

While 2020 was a solid year, Tesla believes 2021  will be even better. And so far, this has been the case. In the first quarter of 2021, Tesla set new records for car production and deliveries. Revenue soared 74% from a year ago,  while net income jumped 2,638%.

When it comes to Tesla, seeing the big picture is important. The company may be leading the charge when it comes to electric vehicles (EVs), but its share of the global auto market is still very low. For context, car manufactures sell 70 million to 80 million new cars globally each year. Tesla sold almost 500,000 cars in 2020, implying a market share of less than 1%. 

While EVs are now a seemingly unstoppable trend, most modern cars still run on an internal combustion engine (ICE). As a top dog in this industry, Tesla is set to ride the EV tailwind, growing its production volume for years to come. Even if Tesla grows its sales volume 10 times over, its market share will still be less than 10%.

Beyond carmaking, Tesla is positioning itself for leadership in emerging industries such as ride-hailing and autonomous vehicles. While it is still early days for these ventures, Tesla's fans believe the company has a serious shot at success. For example, Tesla has leveraged its global fleet of cars on the road to collect billions of miles of driving data -- helping improve its self-driving technology. In fact, as of March 2020, Tesla had collected 3 billion miles of data -- 150 times more than the 20 million miles of data collected by Alphabet's Waymo.

Add into the mix CEO Elon Musk's gravity-defying track record as an entrepreneur, and bulls think they've got a solid case for Tesla to keep growing at high rates.

The bear case

In the beginning, Tesla bears argued that EVs would struggle to go mainstream. That, in turn, fueled a narrative that Tesla would never be able to sell enough cars to turn a profit. Tesla not only proved them wrong, but it also -- arguably -- kick-started the ongoing EV revolution.

Ironically, Tesla's success may be its undoing. Legacy automakers like General Motors (GM 1.35%)Ford (F 1.20%), and Volkswagen (VWAGY 1.17%) are pouring billions into EV manufacturing, aiming to beat Tesla at its own game. As a rising number of established carmakers jump on the EV bandwagon, Tesla risks losing its first-mover advantage. After all, these companies have decades of experience producing and selling cars. In China, Tesla is up against longtime rival BYD and EV upstarts like Nio and Xpeng. These companies are investing heavily to grow their market share -- and some could be better positioned to serve the needs of Chinese consumers. 

Beyond EV, Tesla is also facing intense competition in the autonomous vehicle industry. For example, Honda launched a new car installed with the world's first certified (by the Japanese government) level 3 autonomous driving technology earlier this March while Mercedes-Benz is set to launch its own level 3 autonomous car by the end of this year. While these latecomers might not have as much autonomous driving data (as compared to Tesla), they remain serious contenders in this autonomous driving race. What's more, this might also suggest that Tesla's early mover advantage (including its data advantage), is probably not that much of an advantage. After all, Tesla's self-driving system is only certified as a level 2 autonomous product by regulators.

Bears have also pointed out that Tesla's valuations seem detached from the real world. At $572, Tesla is trading at 17.6  times sales. That's ludicrously expensive -- especially when you consider that General Motors trades at less than 1 times  sales.

In other words, investors have priced in Tesla's potential to succeed in its existing EV business -- as well as its newer businesses. Thus, buying Tesla stock at current valuation is a risky thing to do, as we don't know if these ventures will ever be a success.

Is Tesla a buy now?

As a pioneering EV player, Tesla has huge room for growth in the auto industry. It is also charging into exciting industries like autonomous driving, ride-hailing, and renewable energy. On top of all this, Tesla is led by Elon Musk -- arguably among the best entrepreneurs of our time.

But with competition rising from multiple fronts, Tesla faces an uphill battle to defend its market share. Its new ventures will tread an unbeaten path, with unknown chances of success.

For me, though, the real issue with Tesla is its sky-high valuation. Even after losing almost 40% of its value, Tesla trades at a whopping 486  times trailing-12-month earnings. Should Tesla fail to live up to the market's high expectations, investors might stop rewarding it with such a premium valuation. On top of that, any bad news related to Tesla could send the stock crashing down to earth.

All told, investors should wait for a better entry point before buying the stock.