Tesla (NASDAQ:TSLA) is in serious overvaluation territory. Not too long ago, Tesla stock was at $1,374. Then the company announced a 5-for-1 stock split and shares shot up nearly 50% by Aug. 21. This past Friday marked the record date for the upcoming split, which will take place Aug. 31.
The problem is that there is no financial sense as to why a stock split should make a stock rise in value. Just because Tesla stock will be cheaper after the split is no reason for a 50% rally.
Therefore, there is a very good chance that the stock will retrace its steps over the next month as investors begin to realize that the rampant speculation in the stock has gone too far.
Putting Valuation in Perspective
At the current price of $2,153, Tesla has a market capitalization of $401 billion. The average of 26 analysts polled by Yahoo! Finance estimate that revenue will hit $29.75 billion in 2020 and $41.2 billion in 2021. That implies that Tesla stock trades for an astounding 13.5 times 2020 revenue and 9.7 times 2021 revenue.
These are multiples that normally apply to the earnings of a company, not its revenue. Typically stocks selling at these high multiples cannot sustain such valuations for long.
To put the market cap in perspective, earnings for 2020 are estimated by the same analysts to hit $8.72 per share and $15.65 in 2021. This implies the stock is trading at astronomically high multiples. The price-earnings ratio for 2020 is 246.9 times and 137.6 times for 2021 earnings.
The other way to look at this is you have to have a really long view on the stock to buy it at these levels. But, even so, these valuations seem beyond the pale.
It also seems obvious to me that Tesla stock is likely going to fall once the stock split goes into effect. All the people who made money pushing it up 50% will feel a tremendous temptation to take profits.
What Analysts Say About Tesla
Wedbush raised its target price to $1,900 from $1,800 and assigned a $2,500 bull case target on Tesla stock. In addition, analyst Dan Ives believes that demand from China will act as a huge catalyst for the stock.
At the same time Bank of America analyst John Murphy came out with a “neutral” rating, up from “underperform.” The analyst cited the company’s unfettered access to capital. Murphy said that this would lead to acceleration in its growth. Nevertheless, he said that Tesla would not be the dominant EV maker in the long run. How the analyst came up with that conclusion is bewildering.
Seeking Alpha also cited a Morgan Stanley report that lifted the price target to $1,360. The analyst cited the company’s battery business as one of its primary catalysts for a higher valuation.
Greenlight Capital is still negative on Tesla. According to Seeking Alpha, analysts believe that Tesla may have used accounting tricks. The idea would be to manipulate profits in order to get Tesla stock listed in the S&P 500.
Another analyst, Gordon Johnson, the CEO and founder of GLJ Research, was quoted as saying the stock is “detached from reality.” Tesla is going to make 500,000 vehicles this year, but Volkswagen (OTCMKTS:VWAGY) will make 11 million vehicles. Tesla stock has a market value twice that of VW.
What to Do With Tesla Stock
It should seem obvious that you can’t chase a stock like this. Especially since it is so obvious that the only major reason it ran up 50% in two weeks was a stock split.
The only problem with the VW and Tesla comparison is that it is apples against oranges. The world is moving to electric vehicles. Most cars in 20 years will be electric. And Tesla is clearly ahead of the pack in this regard.
Who is to say that the ratio of volume won’t be inverted between Tesla and VW in 20 years?
Look for an opportunity to pick up Tesla stock in market corrections or even if there is a drop in the stock after this most recent run-up.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. He runs the Total Yield Value Guide which you can review here.
