Earlier this month, Tesla (NASDAQ:TSLA) bulls cheered on a fourth straight quarter of profitability. Those bearish on Tesla stock pointed out that the company’s electric vehicle regulatory credit sales accounted for all its net income.
At this point, Tesla stock is trading purely on its long-term story. Tesla bulls believe bears are being short-sighted. But there’s another risk to Tesla other than the bear thesis. Even if the long-term bull thesis is correct, TSLA may be staring down the barrel of 15 years of underperformance.
The Numbers for Tesla Stock
Tesla stock investors clearly don’t care about numbers. But over the long term, the numbers will ultimately dictate the story.
Tesla reported second-quarter adjusted earnings per share of $2.18, easily beating consensus analyst estimates of 3 cents. Revenue of $6.04 billion also topped analyst estimates of $5.37 billion.
In the same quarter a year ago, Tesla reported a $1.12 per-share loss and $6.35 billion in revenue. Revenue in the second quarter was down 4.9% from 2019. Previously reported vehicle deliveries for the second quarter were 90,650, down 4.7% from a year ago.
Auto gross margins in the quarter were 25.4%, down 0.1% from last quarter and up 6.5% from a year ago. Free cash flow for the quarter was $418 million, down 32% from a year ago.
In a nutshell, Tesla reported negative revenue, auto sales and free cash flow growth in the second quarter. Yet the company was able to far exceed profit expectations due to $428 million in regulatory credit sales, up 286% from a year ago.
In my opinion, the numbers for Tesla are impressive in a difficult global environment. However, year-over-year growth numbers were still fairly lackluster given the recent launch of the Model Y and the opening of the company’s China factory late in 2019.
Trading at $1,500 per share, Tesla stock has a market capitalization of about $280 billion. Tesla now trades at about 103 times forward earnings and 11.8 times sales. Tesla’s forward earnings multiple is about nine times the average multiple of Ford (NYSE:F), General Motors (NYSE:GM) and Toyota (NYSE:TM) at 11.3. Tesla’s price-to-sales ratio is about 29 times higher than the 0.4 average of its auto stock peers.
When comparing Tesla’s valuation instead to the average valuations of high-growth mega-cap tech stocks Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL), Tesla is also extremely overvalued. Tesla’s forward earnings multiple is 133% higher than tech peer averages. Tesla’s price-to-sales ratio of 11.8 is 72.7% higher than tech peers. Not to mention that Tesla’s growth rate was actually negative in the second quarter.
In other words, Tesla’s valuation is absurdly high relative to both auto peers and high-growth tech peers.
The Problem with the Bull Case
Tesla investors can laugh off its extremely high valuation all they want. They can say the numbers will eventually line up with the stock price. But the million-dollar question is exactly how long will that take?
Back in 2000, long-term investors recognized that Microsoft (NASDAQ:MSFT) had a massive long-term growth opportunity with its Windows operating system. From 2000 to 2015, Microsoft’s revenue skyrocketed 327%. But because Microsoft’s stock price got so absurdly high back in 2000, the stock dropped 20% overall from the beginning of 2000 to the beginning of 2015.
The point is that Tesla stock bulls may be 100% correct that Tesla will take bite after bite out of the global auto industry each year for the next 15 years or more. But at the stock’s current valuation, there’s not much upside even if that actually happens.
Long-term Microsoft buyers back in 2020 were right about the company’s growth outlook. But because they bought the stock as such ridiculous valuations, they lost 15 years and 20% of their investment.
How to Play It
Bernstein analyst Toni Sacconaghi is the latest analyst to downgrade Tesla stock.
“Despite our relatively bullish stance on electric vehicle evolution, and structural advantages we believe Tesla may hold, we find it difficult to justify Tesla’s current valuation even under our most bullish/imaginative scenarios,” Sacconaghi says.
He’s conceding the Tesla stock growth story may happen exactly the way bulls say it will. And his rating is “underperform” with a $900 price target.
If you’re a fan of Tesla cars, buy them, drive them and retweet Elon Musk. But don’t lose 15 years of potential market gains by buying Tesla stock at its current valuation.
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 was long GM and GOOGL.