Investors have been aggressively bidding up shares of Tesla (NASDAQ:TSLA) over the past couple of years, and there is a good reason behind this. The company is the leader in the electric automobile revolution. It is the dominant player in this rapidly growing space that analysts think can take over the gasoline automotive industry in the next couple of decades.
It is for this reason that Tesla shares trade with a $28 billion market capitalization despite the fact that it doesn’t earn any profits and despite the fact that it has just $2.1 billion in sales. But while investors feel this valuation is justified, I think that an extremely optimistic scenario is being priced in. Nevertheless, there are reasons to be concerned. Sure, the company will grow its business over the next several years, but the enormous gains to be had have already been realized, and investors are now better off selling and finding the next big thing.
There are several reasons for this.
The first is that the company’s Q1 sales growth deteriorated dramatically from the previous year. Sure, 10 percent sales growth year over year is impressive, but it by no means justifies the current valuation. With a stock trading at 13 times sales one would expect at least 50 percent to 75 percent sales growth, and 10 percent isn’t even close.
The second is that there is a lot of competition in the automotive space. While Tesla is the leader in the electric car space, there are several other well-funded companies in the industry that want a piece of the action such as BMW and General Motors (NYSE:GM). Over time every major car company will have its own line of electric cars, and it is unlikely that Tesla will be able to stay out ahead to the extent that it is right now. Once investors realize this they will start to price in slower growth and this means that the stock price will decline.