Back in November last year, Tesla (NASDAQ:TSLA) shares traded above $1,000 for the first time. This caused plenty of celebrations, but also some voices of concern at the elevated valuation. I was one of those who was concerned. Tesla shares slumped in the following few months, hitting levels below $800 only a few weeks ago. But after a strong rally, the stock now trades back above $1,000. So the question is, where could it go from here?
Reasons for the recent jump
I can point to a few reasons for the rise in the Tesla share price over the past few weeks. Firstly, there has been positive sentiment in stock markets over the past week or so. We’ve seen this in the UK, with the FTSE 100 rallying over 500 points since the second week of March. The story has been much the same in the US.
Tesla has benefited from this because it’s sensitive to investors’ moods. This is true for most growth stocks versus more mature companies.
Secondly, Tesla’s first European gigafactory opened in late March in Germany. It’s taken two-and-a-half years to get it up and running, but now it will help to support expansion in Europe. The factory is expected to turn out 500,000 cars a year.
Finally, Saturday saw the release of impressive delivery results for Q1. Although we need to wait until later this month for the full financials, it delivered 310,048 vehicles. This was up considerably from the 185,000 vehicles delivered in the same period last year. I think Tesla shares lifted last week in anticipation of the positive numbers.
Tough road ahead for Tesla shares
Even with the upbeat reasons mentioned above, seeing Tesla shares above $1,000 still doesn’t sit well with me. Of course, the business is profitable and has reached the inflection point that many waited years to see.
However, being profitable allows me to come up with a more accurate valuation, comparing Tesla to other peers via its price-to-earnings ratio. The current Tesla P/E ratio (given the jump in price recently), is a whopping 219. As a comparison, General Motors has a P/E ratio of 6.5!
The higher Tesla shares go, the higher the P/E ratio will move if earnings stay the same. I do understand that Tesla is a growth stock, and that future earnings could be significant. But even if I take the forward P/E measure (using forecast earnings for the end of the year), it still comes out at 98.
Despite the impressive delivery figures for the quarter, I also see issues down the road relating to supply chain problems. Even if this doesn’t decrease deliveries on a quarter-by-quarter basis, I think it will reduce the growth potential.
Considering all the above, I think Tesla shares will struggle to push higher than $1,000 this year. I expect the valuation and supply chain problems to weigh on the price. On that basis I think I can find better investment options elsewhere.
