Tesla Stock Valuation: Is It Worth Buying?

It’s been a volatile year for Tesla (TSLA -0.20%) stock. Shares fell to around $140 in late April, surged to highs above $260 in early July, and then took a hit following the company’s second-quarter earnings release, putting shares closer to $220. This volatility is indicative of the market’s fast-changing sentiment for the stock. Deciding what Tesla stock is worth is a difficult task.

Why Tesla Stock is Hard to Value

Emerging Technologies and Uncertainty

Tesla is involved in new and evolving technologies, making it challenging to value the stock. Investors need to not only extrapolate current trends in electric cars, energy storage, and solar but also make predictions about unproven products and services yet to launch.

Moonshot Business Segments

Tesla investors must consider the implications of the company’s plans in robotics and its promised self-driving taxi network. Forecasting how these ambitious business segments will contribute to Tesla’s financials is no easy task.

Challenges in Estimating Tesla’s Value

Intrinsic Value Estimation

Coming up with a ballpark estimate of Tesla’s underlying intrinsic value is challenging. With so many uncertain factors, it’s virtually impossible to know what Tesla stock is truly worth.

Investor Sentiment and Market Volatility

Market sentiment for Tesla changes rapidly, leading to significant volatility in the stock price. This makes it even more difficult to assess the stock’s true value.

Is Tesla Stock Uninvestable?

Embracing Uncertainty in Investing

Some investors may deem Tesla uninvestable due to the high level of uncertainty. However, uncertainties are part of investing, and it’s essential to embrace them.

Approaching Growth Stocks

Investors can approach difficult-to-value growth stocks like Tesla by requiring a margin of safety in their investments.

Requiring a Margin of Safety

What is a Margin of Safety?

A margin of safety involves leaving significant room for error in forecasts. For example, if an investor’s estimate of the stock’s value is between $200 and $300 per share, they might require shares to trade at a significant discount before considering buying.

Applying Margin of Safety to Tesla

Given the uncertain nature of Tesla’s business, a large margin of safety is necessary. It wouldn’t be too drastic to require shares to trade as much as 50% below a fair value estimate before buying. For example, an investor might avoid buying Tesla stock until it trades in the range of $100 to $150.

Current Valuation and Financial Trends

Tesla’s Recent Financial Performance

Tesla’s automotive revenue fell 7% year over year in the most recent quarter. The stock’s price-to-earnings ratio of 63 leaves little room for error in optimistic forecasts for the company’s long-term growth potential.

Frothy Valuation

The current valuation arguably prices in both a return to strong growth in automotive sales and positive future contributions from untested businesses like an autonomous driving fleet and robotics. This is a tall order, suggesting the need for a significant margin of safety.

Considering Risk Tolerance

Assessing Risk Tolerance

Investors should assess their risk tolerance and financial situation before owning a stock like Tesla. Given the inherent risks and volatility, Tesla stock isn’t for everyone.

Investor Caveats

Even with a process for buying uncertain stocks, investors should consider whether they can handle the risks associated with owning Tesla shares.

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Should You Invest in Tesla Now?

Analyzing Investment Potential

Before investing in Tesla, consider the Motley Fool Stock Advisor analyst team’s recommendations. Tesla wasn’t among their top picks, which could produce significant returns in the coming years.

Historical Investment Examples

Consider when Nvidia made the list on April 15, 2005. If you invested $1,000 at that time, you’d have $692,784 today.

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Conclusion

No one really knows what Tesla stock is worth. Its volatile nature and involvement in emerging technologies make it a challenging investment. Investors need to require a significant margin of safety and assess their risk tolerance before considering buying Tesla stock.

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