All it took to stop the months-long Tesla (NASDAQ:TSLA) rally was a global outbreak of a deadly disease. After months of rallying hundreds of percent on relatively little fundamental news, TSLA stock has pulled back from their all-time highs of $968.99 to below $730.
Market manias often hit a stock like a tsunami and then die down slowly one or two drips at a time. I’m expecting TSLA stock to continue to drift back down slowly to a more reasonable valuation over the next year or so. I’m guessing the Tesla mania will dissipate in a similar manner that the 2017 bitcoin bubble did.
But unlike bitcoin, Tesla shares actually have some inherent value, especially if the company continues to turn a profit. But the stock has a 52-week trading range of between $176.99 and $968.99. Figuring out the true value of TSLA stock is critical in determining where its ultimate equilibrium point will be.
Analysts Take on TSLA Stock
Jefferies analyst Philippe Houchois recently downgraded TSLA stock, but not because he doesn’t believe in Tesla’s opportunity.
“However convinced we are about the Tesla equity opportunity, we still need valuation to be grounded into some visibility on market size and potential profitability,” Houchois said in the downgrade note. He rates TSLA stock as a “hold” with a price target of $800.
That price target is based on Houchois’ belief that Tesla will be a big long-term winner in the EV market.
“We continue to see Tesla as uniquely engaged in a positive sum-game in the EV transition against legacy OEMs facing more severe strategic choices,” he said.
Bank of America analyst John Murphy remains extremely skeptical that Tesla has turned any type of corner in reaching sustainable profitability.
“While TSLA management believes its business has grown to the point of being self-funding, we believe that TSLA’s pathway to becoming a self-funding entity is still dubious,” Murphy said after the company raised $2.3 billion in capital in February.
Murphy said Tesla’s ambitious growth plans will only require more and more capital as it scales up its businesses. As the business grows, so will its capital requirements.
Bank of America has an “underperform” rating and $370 price target for TSLA stock.
Tesla as an Automotive Investment
The great debate around Tesla is whether it is a cash-cow auto stock or a high-growth tech stock. Auto peers include General Motors (NYSE:GM), Ford (NYSE:F) and Fiat Chrysler Automobiles (NYSE:FCAU). Let’s take a closer look at these auto companies.
The legacy automakers have an average forward price-earnings ratio of 5.1. They have an average price-to-earnings-to-growth ratio of 0.53 and an average price-to-sales ratio of 0.345. They have an average price-to-free cash flow ratio of 6.3.
In the latest quarter, GM reported a 19.7% drop in revenue. Ford reported a 4.9% drop in revenue and Fiat reported a 0.5% increase in revenue.
Tesla reported a 2.1% revenue increase. The stock trades at a forward PE of 53.9. It has no PEG ratio because it is not profitable over the past four quarters. Its PS ratio of 5.7 is about 10 times higher than the legacy automakers. Its P/FCF ratio of 60.9 is also more than 10 times higher than the other automakers.
But I’m guessing Tesla investors don’t like this comparison very much because they say the company is more like a disruptive tech growth stock like Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) or Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
Tesla as a Tech Play
Facebook, Amazon and Alphabet have an average forward earnings multiple of 29.5 compared to Tesla’s 53.9 multiple. Tesla’s PS of 5.7 is slightly above the big tech average of 5.6. Tesla’s P/FCF of 60.9 is way above the big tech average of 33.6.
In the past four quarters, Tesla has averaged 21.5% year-over-year revenue growth. Facebook, Amazon and Google have averaged 22.5% growth.
In other words, Tesla’s growth rate suggests comparisons to big tech peers may be more appropriate than comparisons to auto companies. OK, so be it. Based on that premise, TSLA stock is roughly in line with tech peers based on sales. It is way overvalued based on earnings and free cash flow.
By averaging out Tesla’s 82.7% forward earnings multiple premium, its 1.7% PS premium and its 81.2% FCF premium, Tesla may be overvalued by roughly 55%.
Before I get a bunch of angry comments, by no means do I believe a TSLA stock price target of $326 is accurate. This is merely an exercise comparing the valuation of Tesla to two different groups of peers.
Personally, I believe the fact that Tesla’s revenue growth has been slightly negative overall in the past two quarters makes it closer to its auto peers than its tech peers. However, the company deserves to trade at somewhat of an earnings premium to auto stocks if it can continue to outgrow them.
At the end of the day, I find it difficult to find any peer group for Tesla that makes the stock seem anything but significantly overvalued. However, given the mania surrounding the stock and its large outstanding short position, I continue to recommend investors not to short the stock. Instead, just simply stay on the sidelines.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.