With a market cap of $913 billion as of July 19, Tesla (TSLA -8.78%) has clearly become one of the largest and most followed businesses in the world. And this has all happened in a relatively short time, after the company was founded just 20 years ago.
Thanks to this meteoric rise, Tesla has made some investors lots of money. Those who were smart enough to put $1,000 into this top electric vehicle (EV) stock as recently as just five years ago would have $13,500, translating to a monster gain of 1,250%. The Nasdaq Composite Index, by comparison, climbed just 83% during the same time.
While it's unrealistic to assume that Tesla can come even remotely close to repeating this performance in the next five years, that doesn't necessarily mean it will be a bad investment. Let's run through what makes this a compelling company to own, as well as why investors might still be hesitant.
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Tesla is a dominant force in the industry
Tesla has been a true trailblazer for the EV industry. The company now commands a dominant share of the domestic market for new EV sales, thanks mainly to its first-mover advantage. Tesla shipped 466,000 vehicles in the second quarter of 2023, up 83% year over year. No other car manufacturer comes close to this level of EV scale.
Over the years, Tesla has developed an economic moat, or traits that allow it to fend off rivals. It's a powerful brand, now known for luxury and tech-enabled automobiles. CEO Elon Musk also has a lot to do with keeping the brand on top of consumers' minds. It also helps that the company sells premium vehicles, giving it better margins than most in the industry.
The most obvious growth opportunity lies in producing and delivering more vehicles. And the company can introduce new models. The business started production on its highly anticipated Cybertruck, which can give Tesla a formidable competitor in the market for pickup trucks, the most popular type of vehicle sold in the U.S.
And you can't ignore Musk's ambitions when it comes to the energy industry. Tesla is a car company, yes, but in the future, it could generate the bulk of its revenue from renewable energy initiatives. And this can certainly supercharge growth.
Investors might hesitate to buy the stock
Considering that Tesla shares have skyrocketed in recent years, coupled with the fact that this is already one of the most valuable businesses in the world, it's perhaps not surprising that the stock appears to be overvalued today. Shares currently trade at a trailing price-to-earnings (P/E) ratio of 77. While this is far lower than its historical average P/E of 413, it still makes Tesla an expensive stock.
It's probably not an apt comparison to look at Ford's P/E of 20 and General Motors' P/E of 6, just because these businesses seriously lag Tesla's growth and profit potential. Nonetheless, it gives you an idea of the optimism priced into the shares.
And Tesla is more expensive than a company like Ferrari that straddles the automotive industry and the market for luxury goods. Right now, Ferrari's stock sells at a P/E multiple of 57. So it might be safe to assume that Tesla shares are a bit expensive.
Besides the valuation, investors could shy away because of how competitive the EV industry is becoming. While late to the game, the aforementioned Ford and GM are investing heavily in their own EV capabilities, as many other companies are. This means that Tesla's tremendous growth will likely slow down in the years ahead, as it won't be the only game in town.
Tesla has cut the prices on its vehicles numerous times, a clear indicator of how the market works. The business wants to push more volume, which will pressure margins, as we saw in the latest quarter. Customers certainly consider the brand when making a purchasing decision, but price might be the most important factor. That's always how it will be, a reality Tesla will have to deal with.
If investors are OK with these risks, then maybe the stock looks like a buy right now. Just don't expect the next five years' returns to resemble the past.
