Illustration by Quan Nham.

Falcon Finance: Is the Tesla Stock Overvalued?

Who hasn't heard about Elon Musk? The poster boy of entrepreneurship seems to control the stock market with his infamous Twitter account. Whether you are a bull or a bear, you can't deny Tesla's recent stock spike.

Jan 31, 2021

Tesla (NASDAQ: TSLA) has grown from a small experimental business to an automobile giant. Its market capitalization, the total dollar value of all outstanding shares of a public company, exceeds the likes of Toyota, Volkswagen and General Motors. This makes it the highest valued automobile company in the world. Despite the pandemic, the Tesla stock has seen a whopping rise since last year. As of today, each share of the company trades at 793.53 U.S. dollars.
The Leadup to This Rally
Many consider Tesla to be a growth stock. A growth stock is a stock expected to grow at a rate higher than the average growth rate of the market, often represented by the largest indices such as S&P500 and Nasdaq. When investors buy growth stocks, they are looking to benefit from substantial capital gains — profit generated from the increase of a stock price — and not from dividends — quarterly or yearly payments received for owning a stock.
Tesla is also seen to have the first mover advantage in two critical segments of the automotive industry: electric vehicles and self-driving technology. Moreover, Tesla is an established battery and solar panel manufacturer. Bulls — those who believe the stock price will rise — have long argued that these divisions make Tesla a technology company and not just another car manufacturer. This might justify its current value as tech stocks are seen to have potential for rapid growth in the future.
Furthermore, Tesla is seen as an important player in countering the climate crisis. With the U.S. rejoining the Paris Agreement, it is clear that renewable energy is going to be at the forefront of future policy and bulls believe that nobody can deliver better than Tesla. In addition, the United Kingdom and India have set an ambitious target to become all e-vehicle economies by 2030. Last year, German Chancellor Angela Merkel announced a grant of up to 12,200 U.S. dollars for e-vehicles as she set a “view on the future.” These government subsidies are set to clearly benefit Tesla.
Keeping these future prospects in mind, billionaire investor Ron Baron claims that Tesla has the “potential for $1 trillion [U.S. dollars] in revenues within 10 years.” According to ARK Invests Chief Investment Officer Catherine Wood, the Tesla stock will be valued at 7,000 U.S. dollars by 2024 at a base case — lowest expected value — and 15,000 U.S. dollars at a bull case — highest expected value.
Tesla and Its Competitors
To put the TSLA stock price in perspective, we have to compare its financial ratios to similar companies in the market. A fundamental financial ratio is the price to earnings ratio, also known as P/E ratio. This ratio indicates what investors are willing to pay for every dollar of future earnings. For example, if a share is trading at a P/E ratio of 12x, then people are willing to pay 12 U.S. dollars for 1 U.S. dollars of earnings. On average, the technology sector has a P/E ratio of 30.25x.
If we consider Tesla to be just another automobile company, we must compare its P/E ratio to its competitors in the automotive industry. As of January 22, Tesla’s P/E ratio is 1,700x. Compared to other car makers like Toyota at 15.66x, General Motors at 18.36x and Volkswagen at 23.57x, we can clearly see that Tesla is overpriced.
For those who see Tesla as a technology company, we can compare it to Amazon, Apple and Alphabet — Google’s parent company. Amazon has a ratio of 96.40x, Apple at 42.66x and Alphabet at 36.57x.
Whether we see Tesla as a car-maker or tech company, its P/E ratio shows that its stock is drastically overvalued. Accordingly, analysts believe that even if Tesla’s sales volume grows at a compounded annual rate of 22 percent for 10 years, its value will still be 60 times its earnings per share.
A Dive Into Bankers’ Opinions
A group of JPMorgan analysts, led by Ryan Brinkman, claimed that “Tesla shares are in our view and by virtually every conventional metric not only overvalued, but dramatically so.” The bank has set a surprising price target of 90 U.S. dollars per share. While JPMorgan holds an “underperform” rating on Tesla — believing that it will generate a below-average return compared to the benchmark index — analysts elsewhere have given a “hold” rating, recommending to neither sell or buy it, as the company’s performance will be at the same pace as the benchmark index or comparable companies.
Despite having a competitive advantage, bears — those who believe that the stock price will fall — argued that Tesla is going to face stiff competition in the coming year. Ford, Volkswagen and General Motors have all doubled down on e-vehicle production. This comes after Microsoft invested 2 billion U.S. dollars in Cruise, General Motors’ autonomous driving unit. In Europe, the largest e-vehicle market in the world, Tesla’s Model 3 is only the fourth best selling pure electric vehicle, lagging behind Renault, Volkswagen and Hyundai. China isn’t backing down either; Ni, Li Auto and Xpeng have seen vehicle deliveries surge last year.
The answer to whether Tesla is overvalued lies how we evaluate its future prospects. If we expect Tesla to maintain its lead in the electric car market or see potential in its other divisions — namely Solar, Autonomous Driving and Battery — then Tesla is not overvalued. However, if we purely look at the numbers and the potential of competitors, it is safe to say that the current share price is unreasonably high. While TSLA currently trades at 885 U.S. dollars, 33 analysts who reported 12-month price forecasts for Tesla have given a median target of 545 U.S. dollars. The highest estimate was 1036 U.S. dollars while the lowest was 67 U.S. dollars. Only time will tell whether the bulls or the bears emerge victorious.
This article was written before the release of earnings for the fourth fiscal quarter on January 28.
Manav Mody is a Finance Columnist. Email him at
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