Different investors continue to have wildly different views when it comes to the valuation of Tesla (NASDAQ: TSLA). Over time though, Tesla stock has continued to rise. It is up 18% in a year and 60% over the past five years.
Personally I see it as overvalued and have no plans to buy the shares for my portfolio. As an investor though, I always seek to see both sides of a share and challenge my own thinking.
In doing so, I have been thinking about three factors I think could help Tesla over time.
The car business remains substantial
It is easy to point out what has been going wrong for Tesla’s car business, from declining sales volumes last year to the end of key subsidies in the US eating into profits. Both factors remain a risk, alongside others such as an increasingly competitive electric vehicle marketplace.
But credit where credit is due. Tesla generated just under $70bn of automotive revenue last year. It sold 1.6m cars.
Those are big numbers.
It has an installed user base of millions of vehicles, offering ongoing opportunities for ancillary revenues like software charges. Last year, “services and other revenues” already made up almost a fifth of the company’s total.
It also has major expertise in developing electric vehicles as well as manufacturing them.
I reckon all that gives the firm a strong basis for future sales of both vehicles and services. The brand has suffered in recent years from its boss’s political involvement. But over the long term, if Tesla can manufacture good vehicles efficiently, it may be able to start growing sales volumes again. Plans to cut some models could give it a more efficient business model focused on bestsellers.
The power business is a hidden gem
While last year saw vehicle sales volumes fall, it was not all bad news for Tesla. The fourth quarter saw the company’s power division deploy a record 14.2 GWh of energy storage products.
This business draws on Tesla’s deep expertise in batteries that it has built as part of its vehicle business.
It is already substantial, generating around $12bn of revenues last year. For reference, that is not very far short of the annual revenues of UK energy company SSE, which commands a market capitalisation of £31bn.
With demonstrable expertise and the wind in its sails, I think Tesla’s power generation and storage business has substantial growth opportunity in the coming years.
Robotics could play to its strengths
Still, taking the car business and power generation business together, is Tesla’s market cap of $1.3trn justifiable?
One of the arguments that bullish Tesla holders think might support it (or even mean it merits a higher valuation) is the opportunity it has in robotics.
Tesla has been using robotics for years. Combined with its software knowledge and manufacturing capabilities, the planned Optimus robots could end up being a massive new revenue stream for the company.
But it is over four years since they were announced and the robots are not yet commercially available. Meanwhile, lots of other companies – many with their own expertise – are forging ahead in developing robotics.
Tesla is just one of many businesses in this space and there is no guarantee it will do well.
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