It’s been about three weeks since Tesla (NASDAQ:TSLA) CEO Elon Musk tweeted that TSLA stock price is “too high imo.” The latest electric vehicle sales numbers out of China indicate Tesla’s key growth source may not be as reliable as anticipated.
In the meantime, a new analyst report suggests the long-term growth plants that are key to Tesla’s ridiculous market valuation will be mind-bogglingly expensive.
The China Numbers
One of the driving forces behind Tesla’s 298% rally in the past year in the middle of the worst economic downturn in more than a decade is China. Tesla opened up its China gigafactory late last year, and bulls tout China as the next major growth source for Tesla.
Unfortunately Tesla’s China vehicle registrations dropped 64% in the month of April compared to March, according to LMC Automotive. There were only 4,633 Tesla vehicles registered in China in March.
In fact, new electric vehicle sales dropped 27% overall in China in April.
Bank of America analyst John Murphy has cut his 2020 China EV volume sales growth estimate to -8.6%.
“We attribute TSLA’s slower delivery to: (1) some consumers switching their orders to long-cruise range version of Model 3, which is likely to be delivered in June; and (2) consumers waiting for TSLA to lower the price of Model 3 to be eligible for the new EV subsidy (TSLA finally cut the prices on 1 May),” Murphy says.
As for the outlook for TSLA stock, Murphy is far from optimistic.
“We struggle to justify valuation of 5.5x EV/Sales and 40x EV/EBITDA on our 2020-2021 estimates at the current price of $800, above other richly valued technology companies,” he says.
Bank of America has an “underperform” rating and $500 price target for TSLA stock.
The Cost of Growth
Tesla’s valuation is currently roughly $150 billion, even though it delivered just 367,500 vehicles in 2019. For perspective, Tesla’s market capitalization is nearly in line with Toyota (NYSE:TM) at $188 billion. Toyota delivered 10.7 million vehicles in 2019, nearly 30 times as many vehicles as Tesla.
But Tesla bulls are (always) undeterred. They argue that TSLA stock is not priced based on what it is today. It is priced based on what it will grow into 10 years from now.
I am not denying Tesla’s growth outlook. I’ve never done so. I’ve only ever knocked Tesla’s valuation as reflective of what I consider overly simplistic thinking on behalf of its investors.
Maybe 10 years from now in 2030, Tesla will be selling 10 million vehicles per year like Toyota. But what will it take to get from point A to point B? According to Morgan Stanley analyst Adam Jonas, it will take at least $66 billion.
“We currently forecast Tesla to spend $66bn of aggregate capex through 2030,” Jonas says.
To reach 10 million vehicle sales, Jonas estimates Tesla will need between 15 and 20 gigafactories. Those things aren’t cheap.
As for Tesla bulls all excited about the company’s battery business, Jonas says reaching Musk’s goal of Terawatt-hour (TWh)-scale factories will cost Tesla an additional $84 billion to $114 billion.
Let’s assume Tesla hits its controversial long-term growth goals. Assume the bulls are correct. It will cost as much as $180 billion to get there. Tesla has yet to end a single calendar year with a net profit. Where is that money going to come from?
Expectations for TSLA Stock Are Too High
Jonas isn’t even a TSLA stock bear. He is only skeptical of the potential upside for the stock given the uphill road ahead.
Morgan Stanley has an “equal-weight” rating and $680 price target for TSLA stock.
Since Musk himself said TSLA stock price is “too high imo” on May 1, the stock is up over 16%. Tesla is often criticized for being a cult. I’ve said it’s more like a proxy people are using to wage a political and ideological battle that has nothing to do with smart investing.
After the stock’s rally in the past year, I’m more convinced than ever that TSLA stock is the latest Wall Street mania. Expectations are simply so high at this point that there’s no logical way for Tesla to actually meet them. Tesla will continue to grow. But even if it somehow manages to grow its business by 30 times (that’s approximately 3,000%) over the next decade, the company still has limited upside based on its current valuation.
TSLA stock investors aren’t wrong about the future of the global auto industry. But unfortunately, they are caught up in a stock that has at least temporarily detached from reality. TSLA is way too dangerous to short given even Elon Musk can’t convince investors the stock is overvalued. But there’s no way anyone should be buying at this point.
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.