A £10,000 investment in Tesla (NASDAQ:TSLA) stock five years ago is now worth £17,756. That’s a nice return, but is the share price starting to look exposed at its current levels?
In recent years, revenue growth has stalled and earnings have gone backwards. Investors understandably think the best is yet to come, but they need to think carefully.
Image source: Tesla
Five-year plan
Imagine looking at a stock trading at a price-to-earnings (P/E) ratio of 150, where the earnings per share (EPS) are going to be lower five years from now. That doesn’t look like a buying opportunity.
That’s where Tesla was back in March 2021. And yet, the stock’s up 78% despite EPS being lower than it was back then and with revenues declining in each of the last two consecutive years.
Despite this, investors have been happy to keep buying the stock, mostly because the company seems to have a lot of potential. But that’s been the case for a long time.
Given all this, it looks like a correction – or even a crash – is well overdue. But the stock market doesn’t work in such regular and predictable ways, which is what makes investing fun.
Capital expenditures
Tesla’s official guidance for capital expenditures in 2026 is somewhere above $20bn. In a world where Amazon is set to spend $200bn this year, that doesn’t sound like a lot.
The thing is though, Tesla’s cash from operations over the last 12 months has been just below $16bn. So that means it’s going to have to spend more than it’s bringing in.
The company has the cash on its balance sheet to be able to finance this without needing to take on debt or issue shares. But with the firm’s revenues falling, it’s a difficult time to be spending.
This is probably the biggest threat to the Tesla share price right now. Investments in robotaxis and humanoid robots might pay off in future, but the effect on earnings is unlikely to be immediate.
Incentives
Even the most charitable investors should accept that Tesla has taken longer to achieve its ambitions than initially hoped. But the firm’s latest CEO compensation plan is supposed to be reassuring. I’m not convinced it is. Incentives tied to the company’s market valuation and adjusted EBITDA give Elon Musk a strong incentive to do something like have Tesla acquire SpaceX.
Doing that would boost the value of the overall enterprise. And since SpaceX makes around $8bn in adjusted EBITDA, it would generate progress towards two of the CEO’s compensation milestones.
This however, wouldn’t be much use to Tesla shareholders, since they’d just be sharing the larger firm with SpaceX investors. So I think the compensation plan’s another reason to be wary.
Is the stock going to crash?
Declining earnings mean Tesla shares look expensive right now. But investors seem happy to wait for the robotaxi and humanoid robot divisions to become profitable.
That’s fair enough, but the stock market’s currently taking a sceptical view of companies that are spending heavily. And there’s no real reason for thinking Tesla should be immune from this.
Given this, I’m extremely wary of the stock at today’s prices. With what else is on offer in the stock market, I think I can find much better opportunities for my money.
