I am certainly glad I did not buy Tesla (NASDAQ: TSLA) stock at its high point in December. In under three months, it has crashed by 50%.

Still, that leaves the car maker with a market capitalisation of $754bn, compared to $38bn for Ford and $47bn for General Motors.

So, does Tesla potentially still have a lot further to fall? Or is this an opportunity for me to buy Tesla stock and potentially double my money if it simply gets back to where it stood in December?

Valuations can stay inflated for a long time, but not forever

A share can sell for much more (or less) than it is really worth for a surprisingly long time in some cases. But, sooner or later, reality usually bites. Typically, the valuation gap between what the company is worth and what it sells for is then reduced, or closes altogether.

So, is Tesla worth $754bn, let alone a higher number?

Last year, Tesla generated net income of $7bn. But the prior year it had been $15bn. At that higher level, the current price-to-earnings (P/E) ratio would be 50. That looks high to me and is well above what I would pay.

Taking the long-term view

However, looking out across the next five to 10 years as a long-term investor, what  if earnings do not only get back to the 2023 level but surpass it?

Reasons for that could include higher car sales due to new product launches, improved profit margins thanks to economies of scale, and also contributions from areas like self-driving taxis and robots. Meanwhile, the fast-growing power generation business could also help.

Even doubling 2023 profits over the next five years, though, the prospective P/E ratio at the current stock price is still 25.

For Tesla stock to double from here, I think it would need some additional earnings fillip. That could be from one of its new business projects (like self-driving taxis) significantly outperforming expectations.

Things might get worse

That might conceivably happen.

The Tesla stock price has long moved in fairly wild ways and is up 563% over the past five years despite its recent crash.

But Tesla has a chequered track record when it comes to delivering new projects anything close to on time.

Meanwhile, earnings did not halve last year for no reason. Increased competition in the electric vehicle space has meant pricing pressure, leading to lower profit margins. That could change as the market matures, or lower margins might simply become a permanent feature.

On top of that, vehicle tax credits in markets including the US may wind down. Against that backdrop, Tesla could struggle just to get back to 2023 levels of profitability, let alone do better.

But there is more.

Its car sales fell last year for the first time. Tariff disputes and boss Elon Musk’s high-profile political interventions are also a risk to car sales volumes (although they do provide free publicity of sorts for a business that does not pay to advertise).

To me, Tesla stock still looks highly overvalued.

If sales look like they may fall steeply, I expect the share price to follow. I reckon another 50% drop is possible given how high the current P/E ratio is.

For now, I continue to avoid the stock.