Up 76% in 2023, is Tesla stock now fairly valued?

It’s been a very strong few months for the automaker Tesla (NASDAQ: TSLA). The electric vehicle specialist has increased its value by more than three quarters so far in 2023. Despite its strong performance, Tesla shares are actually 48% below their year-ago level.

What happened – and should I invest, even after the rally?

Story and basics

Tesla is a tall company in strong growth mode. Corresponding market capitalisation, almost $600bn.

I think the company represents an extreme example of what is seen with many stocks. Some investors are excited about what they see as the ‘story’ of the business – its potential. Others focus more on what is known as fundamentals, or hard data that captures the current performance of the business.

Both approaches play a role when it comes to valuing stocks, in my view. Especially for a fast-growing company like Tesla, current business results are only part of the story of long-term opportunities. They help bring a real world perspective though.

Tesla stock has long represented a dispute between investors who see it as overvalued because of its fundamentals — a price-to-earnings ratio of more than 50 — and those who think the investment case is all about the long-term story.

Firing on all cylinders

One of the reasons I think 2023 has been strong so far is that the fundamentals are closer to the long-term story.

Last year’s revenue increased by more than 50%. New production capacity, such as the German factory, means that production volumes can continue to increase. After making consecutive losses for the past three years, last year Tesla more than doubled its net income to $12.6bn.

If you can keep up the growth rate, I think the price of Tesla now really looks cheap. The company benefits from its strong brand, proprietary technology, ballooning user base and increasing demand for electric vehicles.

However, growth can be expensive. Expansion may mean more capital expenditure turns into profit. The company has reduced prices. That may hurt profits but still isn’t enough to defend against growing competition as other automakers catch Tesla’s start in electric vehicles.

If profit growth stalls, or profits decline, the current price may seem expensive.

My name is Tesla

I’m more tempted to add the company to my portfolio than I have been in a long time, even after the 2023 stock price rally.

The business model is now proving itself at scale. That can continue, driving profits and profits.

However, I was still put off by the risk. Competition is growing rapidly. To get to the current valuation, let alone higher, I think Tesla needs to continue to generate strong business growth. This is a difficult feat to accomplish every year.

It might happen. But I prefer the risk-reward balance elsewhere in the stock market right now, so I won’t be buying Tesla stock.