No Matter How You Cut It, Tesla Stock Is Overvalued

After Tesla (NASDAQ:TSLA) failed to deliver any meaningful news for investors the highly-anticipated Battery Day, TSLA stock dropped more than 15% in two days this week.

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Once again, CEO Elon Musk delivered more promises and projections and few actual results. Musk announced Tesla will produce a $25,000 electric vehicle “about three years from now.”

The pledge was a verbatim repetition of Musk’s 2018 claim that Tesla would produce a $25,000 EV “in about 3 years.”

At this point, most reasonable Tesla bulls and bears don’t really take what Musk says seriously. But for anyone looking to buy the Tesla stock Battery Day sell-off, the share price may still have a long way to go before it reaches an appropriate range.

Analyst Take on TSLA Stock

The first place to go to assess value is Wall Street. Tesla is one of the least loved stocks on Wall Street. A recent study of equity analyst ratings on S&P 500 stocks found that about 49% of total ratings are “buy/outperform” ratings, 45% are “hold/neutral” ratings and only 6% are sell/underperform” ratings.

Of the 32 Tesla stock analyst ratings, only 25% are “buy/outperform” ratings. Another 56% are “hold/neutral” ratings. And a surprisingly high 34% are “sell/underperform” ratings. The average price target among those 32 analysts is $314.40, or about 17% below its current level.

Bank of America analyst John Murphy has a typical analyst take on Tesla. Murphy was long bearish on Tesla stock but recently threw in the towel and upgraded the stock to “neutral.”

“Simply put, in our view TSLA is a new disruptive (auto) company that may or may not be dominant in the long-term, but that does not matter as long as it can keep funding outsized growth, with almost no cost capital driving capacity expansion, which justifies a high stock price, in our view,” Murphy says.

In other words, Tesla stock investors seem willing to continue to throw money at the company at any valuation, no questions asked. Pretty much any company can thrive in that type of environment.

A Closer Look at TSLA Stock

Given Tesla produces automobiles, Murphy and other analysts consider TSLA stock an auto stock. Auto stock peers include General Motors (NYSE:GM), Ford (NYSE:F) and Toyota (NYSE:TM). But if Tesla stock is an auto stock, you wouldn’t know it by its share price.

The legacy automakers have an average forward earnings multiple of 10.0. They have an average price-to-sales ratio of 0.34. They have an average price-to-free cash flow ratio of 32.0.

In the most recent quarter, GM reported a 53.4% decline in revenue. Ford’s revenue was down 50.1%, and Toyota’s revenue dropped 39.8%.

Tesla revenue, on the other hand, was down 4.9%. The stock trades at a forward earnings multiple of 134.2. Its PS ratio of 14.7 is about 43 times higher than the legacy auto stocks. Its P/FCF ratio of 145.7 is about 4.5 times higher.

But as soon as Tesla stock skeptics bring up those numbers, Tesla bulls typically argue that Tesla isn’t an auto company. Instead, they say it’s a massive global tech company, like Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) or Microsoft (NASDAQ:MSFT).

Tesla as a Tech Stock

Apple, Amazon and Microsoft have an average forward earnings multiple of 42.6 compared to Tesla’s 134.2 multiple. Tesla’s PS of 14.7 is nearly double the big tech average of 7.7. Tesla’s P/FCF of 145.7 is about three times the big tech average of 48.7.

In the past four quarters, Tesla has averaged 5.3% revenue growth. Apple, Amazon and Microsoft have averaged 15.6% growth.

In other words, Tesla’s growth rate suggests its valuation should probably be somewhere between the valuations of big tech peers and those of auto peers.

By averaging out Tesla’s forward earnings multiple, PS ratio and P/FCF premiums, Tesla would need to trade at around $15 to have a valuation in-line with auto peers.

But by comparing Tesla to tech peers, its valuation premium isn’t quite as extreme. TSLA stock trades at a 215% forward earnings multiple premium to tech peers. It trades at a 90.9% PS premium and a 199.1% FCF premium. The average of those valuation premiums suggests Tesla may be overvalued by about 168% and implies a price target of around $141.

Of course, Tesla will need to improve its revenue growth significantly from its recent levels to warrant the type of valuations these pure tech stocks enjoy. Personally, I believe Tesla shares deserve to trade at a premium to the valuation implied by its auto stock peers and a discount to the valuation implied based on tech peers.

Final Takeaway

At the end of the day, it’s difficult to find any reasonable peer group for Tesla that makes the stock seem anything other than extremely overvalued. However, given the ongoing market mania surrounding TSLA stock and other EV stocks, I continue to recommend traders not short the stock. The safest place to be when it comes to Tesla is the sidelines.

On the date of publication, Wayne Duggan held a long position in GM.

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.

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