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Is the falling Tesla share price a buying opportunity?

The Tesla share price has dropped by nearly 25% in 2021. Is this a buying opportunity for the electric vehicle manufacturer?

by | Last updated 1 Mar, 2023 | Automotive

hand turning on an electric vehicle

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The Tesla (NASDAQ:TSLA) share price exploded in 2020, rising from $130 per share to nearly $800. That’s more than a 500% increase!

But since the start of 2021, the EV stock has seen some pullback and now trades around $610 per share. Is this a buying opportunity, or is this the start of a bubble bursting? Let’s take a look.

The rising Tesla share price

Telsa has been capturing a lot of media headlines recently. In early 2021, it overtook Facebook (NASDAQ:FB) as the fifth-largest US company by market capitalisation. The company continues to maintain incredible retail investor support worldwide. And its cutting-edge technology still remains desirable amongst consumers.

The headlines kept rolling in as the business invested $1.5bn into Bitcoin, as well as announcing the construction of new battery storage farms. Meanwhile, Cathie Wood, the founder and head of ARK Invest, recently placed a $3,000 target price on Tesla shares.

Tesla sounds like it’s doing brilliantly. At least that’s what the rising share price would suggest. But I have some concerns surrounding the underlying business.

Some potential problems

While on the surface, Tesla appears to be flourishing, I have spotted a few signs that I find alarming. The level of competition in the electric vehicle market is rising quickly. Companies like NIO (NYSE:NIO), Mercedes, and Volkswagen have already begun launching their own electric vehicles and stealing market share in the process.

I also question the legitimacy of Telsa’s 2020 profits. Last year’s net income was a solid $690m versus a loss of $870m in 2019. But upon closer inspection, these profits derived primarily from selling carbon credits to other manufacturers rather than actual car sales. As a reminder, a carbon credit is a tradeable certificate that represents the right to emit one tonne of carbon dioxide (or equivalents). Personally, I don’t think this is a sustainable method of generating profits in the future, especially since other manufacturers are now beginning to eliminate their carbon footprints.

A final risk I spotted surrounds product recalls. In early February, Tesla was forced to undergo its third product recall in the space of 12 months. 36,126 of its Model S and Model X cars were recalled due to problems with their touchscreens. To make matters worse, Germany’s automotive regulator has begun investigating the company over safety concerns.

Is this a buying opportunity

As worrying as I find these potential pitfalls, there is no denying the massive electric vehicle market opportunity. Sales trends from the Society of Motor Manufacturers and Traders revealed a 50% decline in petrol-powered vehicle sales. At the same time, battery-powered electric vehicles saw a 54.4% increase.

Today electric vehicles only make up 6.4% of the total car market worldwide. Needless to say, that is an enormous opportunity for growth and could be one of the reasons why Cathie Wood has such a high price target.

But, growth often comes at a price, and in the case of Tesla, the price is exceptionally high. As of today, the stock is trading at a P/E ratio of 980. To put that in context, the market average is around 15. 

Personally, I think there are plenty of other stocks out there that can achieve a similar level of growth for a much better price. And so I won’t be adding Tesla to my portfolio today, at least not at its current share price.

Especially since I’ve spotted another stock that looks far cheaper with a much larger market opportunity…

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Zaven Boyrazian does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

Written By

Zaven Boyrazian, MSc

Zaven is an investment analyst that has worked in several industries throughout his career, from aircraft factories to game development studios. He has been actively investing in the stock market for the better part of a decade, managing over $1 million across multiple portfolios.

Specializing in corporate valuation, Zaven employs a modern take on the principles set out by Benjamin Graham to find new opportunities at fair prices.

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Edited & Fact Checked By
Zaven Boyrazian MSc

Zaven has worked in several industries throughout his career, from aircraft factories to game development studios. He has been actively investing in the stock market for the better part of a decade, managing over $1 million across multiple portfolios.

Specializing in corporate valuation, Zaven employs a modern take on the principles set out by Benjamin Graham to find new opportunities at fair prices.

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