You may not realize it, but investors have witnessed history over the past two years. The coronavirus crash in the first quarter of 2020 marked the quickest decline of at least 30% in the S&P 500's storied history. It took about a month.
Meanwhile, the subsequent bounce from the March 2020 bear-market bottom is the strongest on record, with the benchmark index doubling in value in under 17 months. Considering that the S&P 500 has averaged an annualized total return, including dividends, of around 11% since 1980, a doubling in value in less than 17 months is an eyebrow-raising event.
However, the broad-based index isn't the only thing that's caused investors' jaws to hit the floor since the bear-market bottom was hit. Electric vehicle (EV) manufacturer Tesla Motors (TSLA -1.06%) has delivered a 1,305% gain, through this past weekend, from its bottom nearly 21 months ago.
The question is: Should investors still buy Tesla after the company tacked on more than $900 billion in market cap? Let's take a closer look.
From left to right, a Tesla Model S, Model 3, Model X, and Model Y, parked at a Supercharger station. Image source: Tesla.
Tesla is riding a wave of first-mover advantages
Tesla is, far and away, the best-known name among pure-play EV manufacturers. It became the first auto company in over five decades to build itself from the ground up to mass production, and its operating results are beginning to show real momentum.
To state the obvious, Tesla is staring down a multidecade vehicle replacement cycle opportunity. With most major global economies combating climate change, one of the easiest ways to reduce our carbon footprint is to promote EVs. With a presence in China and the U.S., the global No.'s 1 and 2 in auto sales, Tesla is in great position to secure and potentially maintain a large share of annual EV sales in these core markets.
Despite global supply chain issues and semiconductor chip shortages, Tesla has also not seen a slowdown in production or deliveries. With 627,350 deliveries through September, the company could make a run at well over 850,000 deliveries this year. That's well above Wall Street's early year expectations, and it provides evidence that Tesla can maintain production and delivery growth of around 50% over the next couple of years. As a reminder, two new gigafactories are in the works in Austin, Texas and Grunheide, Germany, with production in Austin slated to begin within the next couple of weeks.
Further, Tesla continues to ride a wave of first-mover advantages. Aside from being able to produce and deliver more EVs than its pure-play competition, the company's batteries have consistently offered better range, capacity, and power. When this is added to Tesla's Supercharger network, which recently reached a milestone of 30,000 stalls worldwide, it's easy to see the night-and-day difference between Tesla and its peers.
Lastly, Tesla is making inroads in the operating income column. Over the past two quarters, Tesla's operating margin has pushed into the double digits, with respective adjusted net income of $1.62 billion (Q2 2021) and $2.09 billion (Q3 2021).
Image source: Getty Images.
Should failing forward be rewarded?
But there's another side to this story. Pessimists also have a very strong case that Tesla is wildly overvalued at a $1 trillion market cap and shouldn't be rewarded for failing forward.
Although Tesla has been wildly successful in bringing people the Model X (midsize SUV), Model Y (SUV), and the more affordable Model 3 sedan, the company's timeline to bring new innovation to market is a constant struggle. This is to say that the company or CEO Elon Musk frequently provide expected timelines when new products or innovation will be available only to kick the can further down the road.
To build on this point, Tesla's Full Self Driving (FSD) innovation has failed to deliver at times over the past five years. FSD is designed to improve transportation safety and handle most driving functions for Tesla's EVs. In October, Tesla rolled back the latest beta version of its FSD after drivers complained of phantom forward collision warnings and disappearing Autosteer options, among other issues.
Beyond instances of failing forward, it's tough to say if Tesla is going to be able to hang onto its first-mover advantages for much longer. General Motors has committed $35 billion through 2025 on EVs, autonomous vehicles (AVs), and battery research, and plans to launch 30 new EVs globally. It's a similar story for Ford Motor Company, which has allocated $30 billion for EV and battery research through mid-decade and intends to launch 30 EVs in that time. These are auto stocks with history behind their brands and established infrastructure in place.
As for Tesla's income statements, they're not all they're cracked up to be, either. The world's leading EV producer has been leaning on the sale of renewable energy credits to lift its net income for years. Though Tesla has been profitable over the past two quarters from selling EVs, this wasn't the case the previous year and a half. Call me crazy, but a $1 trillion company shouldn't still need to prove to Wall Street that it can generate a profit from selling its core product.
And that leads to the final point: valuation. In an industry known for single-digit forward price-to-earnings (P/E) ratios, Tesla is commanding a forward-year P/E of 124, and is valued at more than 100 times its trailing 12-month operating cash flow. History would suggest these figures aren't sustainable.
Image source: Getty Images.
The verdict
Having seen both sides of the coin, it's time to return to the original question: With Tesla up 1,305% since hitting its pandemic low in March 2020, is it still a buy?
The verdict is a very blunt no.
To be fair, Tesla has proved me wrong before on multiple occasions, and it's always possible it could do so again. Although it's been slow to execute on many of its innovations, the company has eventually brought new products and services to market, as intended. It also has proven innovator Elon Musk directing traffic, so to speak.
But there are too many red flags to ignore, even for the most-aggressive growth stock investors. It can't be overlooked that there are a growing number of competitors throwing billions of dollars at EV, AV, and battery research. It's unrealistic to expect Tesla to maintain its competitive edge for much longer, which makes its valuation nothing short of insane.
Personally, I view Musk as a liability as much as I do a positive for the company. Though no one doubts his innovative desire, Musk's questionable antics on Twitter, and outside of Tesla with the cryptocurrency market, make him a sometimes unwelcome distraction.
If I were given money to invest with the stipulation that it had to be put to work within the auto industry, I'd much rather own an established automaker like GM or Ford. These are companies with generational branding power and global infrastructure already in place. That sounds far more appetizing than hoping Tesla executes flawlessly from this point on -- which is what would have to happen to maintain a $1 trillion valuation.
