Tesla Stock Is Overvalued, But Shows No Signs of Slowing

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Tesla (NASDAQ:TSLA) stock is up 27% in one month. Investors hoping for a pullback remain bitterly disappointed. In many ways, Tesla stock has become a symbol for the stock market in 2020. The novel coronavirus pandemic ground several countries to a halt. However, the stock market started and finished the year on record highs. TSLA and other risky electric-vehicle (EV) stocks are the crown jewels of this surprising trend.

Tesla (TSLA) Motors Assembly Plant in Tilburg, Netherlands.

Source: Shutterstock

Contrarian views are emerging, though. Ahead of Tesla’s Dec. 21 addition to the S&P 500, JP Morgan analysts wrote, “We recommend investors not weight Tesla shares in their portfolio in equal proportion to the S&P because Tesla shares are in our view and by virtually every conventional metric not only overvalued, but dramatically so.”

Exane BNP Paribas analyst Stuart Pearson offered another bearish view. “Never before have the hopes and dreams of entire industries been so concentrated into one stock,” wrote Pearson in a Jan. 5 research report. “Tesla’s strategy is to bet the farm that it can nearly triple its [battery electric] market share while fending off the tech-titans in the race to autonomy. Neither are credible in our view.” Pearson rated Tesla shares a “buy” until early 2020.

However, the change in stance is not unique. Out of 35 analysts covering the company, 12 have a “hold” rating on shares. However, Tesla’s ascent seems like a given in the current environment. Tesla bears have borne over $38 billion in mark-to-market losses in 2020, according to data from S3 Partners. However, with a 12-month consensus target of $544 per share, it’s hardly the time to add more Tesla stock to your portfolio.

Tesla Stock: Divorce Between Fundamentals and Valuation

Betting against Tesla is a trying proposition. Tesla CEO Elon Musk can declare 2020 a victory in his long battle against short sellers.

Retail traders are hyping up the company due to the worldwide adoption of EVs and the innovation Tesla offers. However, there is nothing to suggest that there is a connection between the stock’s fundamentals and its valuation. Shares are trading 208.3 times forward price-to-earnings (P/E) even though it’s expected to deliver half a million cars for 2020.

Meanwhile, General Motors (NYSE:GM) sold 2.5 million cars and light trucks in 2020. Additionally, it’s stitched together six consecutive quarters of positive earnings surprises. Yet, GM stock trades at 8.35 times forward P/E.

Elon Musk is also aware of all this. In a companywide email sent early December last year, the richest man in the world said Tesla stock could “get crushed like a soufflé under a sledgehammer” if profits didn’t continue to grow.

Competition Is Ramping Up

Although it may not seem like it, Tesla is not the only name in town when it comes to EVs. Volkswagen (OTCMKTS:VWAGY) finished 2020 with 422,100 new plug-in electric car deliveries, an increase of 195% year-over-year. It represents over 4.5% of the overall volume and is a nice launching pad for more than 10% in 2021. Meanwhile, the trio of New York-listed Chinese electric-vehicle groups — Nio (NYSE:NIO), XPeng (NYSE:XPEV) and Li Auto (NASDAQ:LI) — are worth a combined $165.68 billion. Each of them delivered stellar sales growth in 2020.

Moving forward, several traditional automakers are increasingly turning toward electric vehicles to play this red-hot trend. GM plans to spend $27 billion on all-electric and autonomous vehicles through 2025. The investment will support GM’s plans to release 30 new EVs globally by 2025, including over 20 for North America. Meanwhile, Toyota (NYSE:TM) and Ford (NYSE:F) are overseeing the rollout of their own respective EV lines.

Tesla is worth more than the nine largest car companies combined. However, the shift to electric vehicles will not happen overnight. Many countries will have to build out infrastructure, which will take years and trillions in tax dollars.

Hence, having a company totally reliant on one business segment is risky. Plus, China’s biggest EV market in the world has strong local brands like NIO — the Chinese prefer their local brands over all others. That’s why the Palo Alto, California-based company should not rest on its laurels.

Let Tesla Stock Come Back to Earth

I get the hype surrounding Tesla stock. Shares closed on Jan. 25 at $880.80 a pop. Tesla went public more than 10 years ago, pricing shares at $17. Had you invested $10,000 in Tesla in 2010, your investment would be worth over half a million today. Naturally, this kind of growth is unheard of, precisely why Tesla fits the criteria associated with asset bubbles.

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the U.S. and the world’s biggest automaker. Time will tell when the ball drops. Analysts have a 12-month price target of $552 per share, a 34.5% downside to the current share price. Out of 35 analysts covering Tesla stock, only 13 have given a bullish verdict.

Tesla stock is undoubtedly overvalued. But bears have been burned so much; it seems it doesn’t matter anymore.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.


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