Tesla (NASDAQ:TSLA) shares are down nearly 25% since the company announced it invested in Bitcoin on Feb. 8. TSLA stock hasn’t made a new high since it hit $900.40 back in January. It’s now back down below $700.
Sure, TSLA stock is cheaper than it was a month or two ago. But anyone who is tempted to “buy the dip” in Tesla should keep some perspective on the stock and its valuation. Since mid-2019, TSLA stock has been caught in a stock market mania that has been fueled by a flood of new retail stock traders and three rounds of government stimulus payments. During periods of market mania, investors flood into a stock like Tesla all at once. When the stock deflates, however, the share price trickles back down one or two drips at a time.
The million-dollar question for Tesla investors is what exactly is a fair value? Over the past two years, the stock has traded as high as $900.40 and as low as a split-adjusted $35.40. Where does Tesla’s true valuation fall in that massive range?
Analysts Take On TSLA Stock
Bank of America analyst John Murphy upgraded Tesla stock back in August. But he’s still cautious on the stock after its parabolic run in the past two years.
“TSLA’s future growth is still contingent upon its ability to fund additional product development, capacity expansion, and other initiatives, and we believe the company has yet to prove itself as truly self-funding while still in aggressive growth Phase,” Murphy says.
He’s referring to Tesla’s inability to turn a profit without relying on regulatory credit sales. Analysts expect those sales to completely dry up in coming years.
“Simply put, in our view, TSLA is a new disruptive (Auto) company that may/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, which justifies a high stock price,” Murphy says.
Bank of America has a “neutral” rating and $900 price target for Tesla stock.
Morningstar analyst David Whiston says Tesla stock currently trades based on CEO Elon Musk’s claims that the company can produce 20 million vehicles a year by the late 2020s. That production rate would be roughly double the current rates of Toyota (NYSE:TM) and Volkswagen (OTCMKTS:VWAGY).
“We believe the stock trades on the option value of what it may look like years from now rather than on fundamentals and free cash flow generation, so we think investors should consider the upside and downside risks should they want to chase momentum,” Whiston says. That’s a very diplomatic statement. However, Whiston’s “sell” rating and $349 price target speak louder than his words.
Tesla As An Auto Stock
Analysts can’t agree on where Tesla stock is headed next, so let’s compare it to its auto peers. Looking at Toyota, General Motors (NYSE:GM) and Ford (NYSE:F) are a good starting point for valuing Tesla.
The legacy automakers have an average forward price-earnings (P/E) ratio of 11.35. They have an average price-to-earnings-to-growth (PEG) ratio of 0.86 and an average price-to-sales (P/S) ratio of 0.69. They have an average price-to-free cash flow ratio (P/FCF) of 21.41.
In the latest quarter, GM reported 21.7% revenue growth. Ford reported a 9.4% drop in revenue and Toyota reported an 8% increase in revenue.
Tesla reported a 45.5% revenue increase. The stock trades at a forward P/E of 118.22 and a PEG ratio of 32.71. Its P/S ratio of 19.88 is nearly 30 times higher than the legacy automakers. Its P/FCF ratio of 106.84 is also more than five times higher than the other automakers.
But I’m guessing Tesla investors don’t like this comparison very much because they say the company is more of a disruptive tech growth stock like Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) or Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
Tesla As A Tech Play
Facebook, Amazon and Alphabet have an average forward earnings multiple of 44.4 compared to Tesla’s 1050.1 multiple. Tesla’s P/S of 19.88 is about three times the big tech average of 7.02. Tesla’s P/FCF of 106.84 is more than 2.5 times the big tech average of 42.08.
In the past four quarters, Tesla has averaged 27.9% year-over-year revenue growth. Facebook, Amazon and Google have averaged 23.5% growth.
That growth rate is the primary reason many Tesla stock bulls insist tech growth stocks are a better comparison than auto stocks. For the sake of argument, let’s just assume that’s fair. Tesla’s revenue growth is roughly in-line with these big tech peers. It is still extremely overvalued based on all the other metrics.
By averaging out Tesla’s 295% forward earnings multiple premium, its 190% PS premium and its 158.6% FCF premium, Tesla may be overvalued by about 214%.
But before I get a bunch of angry Tweets, I’m not calling for Tesla stock to hit a $244 price target any time soon. I have no idea where that crazy stock is headed in the next week, month or year.
I also believe Tesla is more a hybrid of a tech stock and an auto stock than a pure tech stock. There’s no way Tesla will ever be able to sell cars at margins anywhere close to the profit margins of Facebook or Google. However, Tesla is clearly outgrowing its auto peers, so I think a valuation somewhere in the middle would be most appropriate.
How To Play It
A stock like Tesla can trade at a ridiculous valuation for as long as its investors are willing to pay ridiculous prices. But I will say it’s difficult to find an example of a stock that trades at a ridiculous valuation indefinitely.
The market may stay irrational for another year or two. In the meantime, there are plenty of much more attractively valued investments out there, including all the other auto stocks and tech stocks I mentioned above.
On the date of publication, Wayne Duggan held long positions in GM and GOOGL.
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.