EV giant Tesla (NASDAQ:TSLA) is one of the most divisive companies in recent history. Analysts have varied claims about what TSLA stock is worth, which has led to a massive dispersal between its high and low estimates.
Tesla was one of the major winners in the EV space in the past year, with its 12-month returns at a whopping 396%.
Moreover, it delivered close to 500,000 vehicles in 2020, mostly in line with its guidance. However, the growing competition from its Chinese competitors and its parabolic valuation continues to limit its attractiveness.
Don’t get me wrong, though, regardless of its lofty valuation, and Tesla has arguably the best performer in the EV space. In its most recent quarter, it delivered close to 185,000 vehicles, which comfortably surpassed its estimates.
It could potentially sell up to 700,000 vehicles at this pace, which is roughly 200,000 more than 2020. Additionally, the company’s five-year average growth rate is at a stellar 51.4%. However, the real question is whether its performance justifies its parabolic market capitalization of over $700 billion.
Uncertain Future in China
Tesla was taking the Chinese EV market by storm at the beginning of 2020. However, as the year has progressed, it has run into certain roadblocks that will threaten its prospects if unchecked.
The first is that the competition is heating up considerably in the domestic EV market with a few companies that have done exceedingly well in capturing consumer interest.
The second relates to the geopolitical tensions between China and the United States, two of Tesla’s biggest markets.
Several homegrown companies in China have thrown their hats in the proverbial EV ring. Two of the most promising ones are by far Nio (NYSE:NIO) and XPeng (NYSE:XPEV).
Both companies are coming off their most successful years to date and will continue to push ahead in 2021. Other international automakers are also looking to expand their positions in the Chinese EV market. For instance, you have General Motors (NYSE:GM), which partnered with a Chinese company, to bring the Wuling Hongguang Mini EV last year.
Then you have another problem that relates to Tesla’s relationship with the Chinese government. So far, it has received unprecedented support from the government in expanding its presence in the country. It was the first automobile company to have sole ownership of its Chinese manufacturing operations.
However, in exchange for the subsidies and factory ownership, the company agreed to several contractual obligations that leave it at the state’s mercy. Hence, it could find itself amid a geopolitical crossfire between two of its top markets.
The Customary Pricing Discussion
No article on Tesla can complete without a discussion on its lofty price. To say that its market cap grew in 2020 would be a major understatement.
Its market cap was around $81 billion at the beginning of the year and has increased by more than 770% to roughly $710 billion.
TSLA stock currently trades at unheard of price multiples at this time. For instance, it trades at a forward price to sales ratio of over 14 times, which dwarfs the sector average by over 900%. Moreover, its forward enterprise value to sales ratio is also over 14 times, exceeding the sector average by a massive 742%.
At this point, Wall Street expects the company to deliver close to 750,000 cars in 2021, which racks up to an estimated $48 billion in revenues. This is approximately 50% growth in sales and deliveries. If it achieves its outlook, even then, it trades at a price to sales ratio of 12 times, which is still insane.
Bottom Line on TSLA Stock
TSLA stock grew tremendously in 2020, and it appears that it won’t be stopping anytime soon. Investors seem to be ignoring Tesla’s China problem at this time and are focusing more on its impressive delivery updates.
The reality is that TSLA stock is incredibly overvalued, and its growth hardly justifies its current price. Therefore, it’s best to steer clear of the stock unless there’s a major stock correction.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
