Tesla (TSLA +2.96%) has taken its investors on a volatile ride. Shares currently trade 36% off their peak price. But in the past five years, they have crushed the market, rocketing 1,520% higher. This would have turned a $10,000 initial capital outlay into $162,000 today.
The Elon Musk-led enterprise has seen strong momentum from the investment community recently. This electric vehicle (EV) stock has surged 84% since the end of April. But investing should be a long-term game. With this mental framework, where will Tesla be in five years?
Tesla's past
Tesla has historically been known for posting rapid growth. The impressive top-line gains happened thanks to strong interest in its EV lineup. Additionally, the company's premium pricing and manufacturing cost advantages resulted in rising profitability.
But in the past couple of years, this favorable backdrop shifted. Higher interest rates make buying a Tesla car less affordable for consumers because their monthly payments are higher. This backdrop is a headwind, driving just 3% revenue growth in fourth quarter last year before another 3% increase through the first six months of this year.
Adding to the worries is intense competition. Legacy automakers are developing their own EVs. And in China, where EV penetration is well ahead of the U.S., there are lower-cost options that customers are flocking toward. Tesla has had to cut prices numerous times to maintain its competitiveness, which has crushed margins.
It's no wonder shares trade 36% below their all-time high, a milestone that was achieved at the end of the 2021 bull market in November.
NASDAQ: TSLA
Key Data Points
Tesla's future
Even after Tesla's price decline, I still believe the stock is expensive. Shares trade at a price-to-earnings (P/E) ratio of 73. In the past five years, the P/E multiple has averaged 312, so the current valuation might be compelling. I'm not convinced, though.
In my opinion, Tesla remains a story stock that's driven by the market's unrelenting belief in Elon Musk. Part of this has to do with the company's optionality. Today, 78% of Tesla's revenue comes from selling EVs. But this could change in the future.
On Oct. 10, Tesla will hold its highly anticipated robotaxi event. Here, Musk could outline a more detailed design for its cybercabs and timing of developments. And investors will be watching closely to find out when the business will finally be able to introduce fully self-driving (FSD) technology. A breakthrough here could fundamentally change the trajectory of the company.
If Tesla can eventually launch this technology to the masses, it could essentially create a global ride-hailing service similar to Uber's. However, Tesla's service would consist of all autonomous vehicles that it makes itself. For consumers, the cost of ride-hailing would drop significantly. And for Tesla, the result could be a massive high-margin revenue opportunity.
It's unclear what the probability is of this actually happening. On the one hand, if Musk reveals information that impresses the market and provides much-needed clarity, then it could be a huge win for the stock.
But if history is any indication, Tesla's founder and CEO has a track record of overpromising and underdelivering. And when it comes to FSD capabilities, there are still major regulatory and technical hurdles to clear. Plus, consumers might be a long way from being able to trust these machines in their daily lives.
Tesla is still a manufacturer of cars, but these EVs aren't standing out in the market like they once did. This reality should result in tempered investor expectations.
It's commendable what Tesla has achieved, completely disrupting the global auto industry and spurring advancements in EVs. However, its current valuation is too rich for me, particularly when you consider the current state of the business. And therefore, I believe this stock will underperform the Nasdaq Composite Index over the next five years.
