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…