Tesla Is Still Fundamentally Overvalued

Tesla (NASDAQ:TSLA) stock has lost about one-third of its value since hitting an all-time high of $1,222/share at the start of November.

Tesla (TSLA) badge on back end of red Tesla car
Source: Hadrian / Shutterstock.com

Tesla stock opened on Feb. 28 at $815. That’s still a market capitalization of over $890 billion on 2021 revenues of $53.8 billion. Tesla brought 10% of that revenue to the net income line, but the price to earnings (P/E) ratio is still 177, and the price to sales (P/S) ratio 17.

Tesla stock has always risen against a tide of bearishness, an assumption that CEO Elon Musk could not do what he was in fact doing. But fewer than 3% of shares are now being held short. Analysts are bullish, with 16 of 29 at Tipranks saying buy it.

That’s probably why I wouldn’t touch it right now.

Tesla Still Just Makes Cars

CEO Elon Musk has always called Tesla a technology company, but it is still a manufacturer. Manufacturers need supply chains. Supply chains around the world are being disrupted. War and pandemics are inherently disruptive things. Both are generally unhealthy for economies and other living things.

Ultimately, Tesla isn’t falling because of Musk’s Twitter, a Justice Department probe of shorts or relations with the Biden administration.

It’s falling on fundamentals. Scaling is difficult. It doesn’t get easier, for cars anyway, after the initial scaling.

The electric vehicle posse has been after Tesla for years, and they’re closing in. Lucid Group (NASDAQ:LCID) and Rivian (NASDAQ:RIVN) are delivering electric cars that look very Tesla-like. Ford Motor (NYSE:F) has begun doing the same. Volkswagen (OTCMKTS:VWAGY) is ramping up production. Chinese companies are now strong enough to get by on reduced government help.

To justify its current price, Tesla needs to become bigger than General Motors (NYSE:GM) or Ford within just a few years. Opening its German plant will help. But you’re still assuming last year’s growth of 83% in car deliveries can be replicated. You’re still assuming Tesla can produce, and sell, hundreds of thousands of its butt-ugly Cybertrucks in Texas against Ford, GM, and Toyota (NYSE:TM).

Stock Market Exuberance

Tesla stock has been falling even while pension funds like Canada’s have been piling in. The assumption is that Tesla is Apple (NASDAQ:AAPL), that its software, electricity, insurance and services will multiply the value of each Tesla sale. But almost 90% of Tesla revenue still comes from cars. Tesla is not a solar panel company either. Battery storage revenues fell 38% in 2021.

That’s not to say Tesla hasn’t performed well. It has.

But its stock price assumes it can keep growing near its present rate, even as electric car production elsewhere ramps up.

We saw this last year with cloud stocks. There’s a limit to what people will pay for growth. Tesla seems to have gone through that limit, at ludicrous speed.

Meanwhile the Musks have taken their eyes off the ball. Buying Bitcoin while pretending to be unaware of its environmental damage is just stupid. Going into the video game industry is also stupid.

The Bottom Line on TSLA Stock

There are limits to what investors should pay for growth.

I think Tesla has exceeded those limits.

This doesn’t mean Tesla is a bad company. I think it can easily grow its top line by 50% this year, profitably. But then that growth is going to slow. Big numbers are harder to shift. The diversity of income Tesla once promised isn’t happening. It’s still a car company, and Elon Musk is growing bored with it.

If you assume TSLA stock is worth 10 times current revenue, or that its profit can double and it’s worth 30 times that, you’re still looking at a big drop in its stock price. I think there are better growth opportunities out there, in clouds, in software, in things that scale more easily than cars.

On the date of publication, Dana Blankenhorn held a long position in AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.

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