Tesla (NASDAQ:TSLA) — and TSLA stock — are facing some tough challenges. Like all automakers, the company has to deal with the fact that, for the last six weeks, most Americans haven’t driven much or thought about buying new cars. But unlike most of its competitors, Tesla is hurt, not helped, by the current extremely low oil prices. Finally, Tesla will have to contend with the impact of a recession, anti-American sentiment in China, and ever-increasing competition.
Yet, with all that, the valuation of TSLA stock is still way above the market’s average and around 100 times above that of its competitors. Moreover, despite the novel coronavirus crisis, the shares have risen an incredible 81% this year.
Coming Macro Rebound Won’t Help
I’m definitely not one of those commentators who think that the health crisis will stretch on for many months. In fact, over the last few weeks, I’ve stated many times that I expected the virus to slow and the closures to ease in mid-April. Although I was a bit too optimistic, that scenario has indeed started to play out now.
And as I wrote in my recent column on Ford (NYSE:F), I do expect the decline of miles driven “to be shorter and less intense than many believe.” Further, as I also contended in that column, many Americans who previously used mass transit will buy cars in order to drive to where they want to go instead.
But I also admitted that for the next few months, overall driving levels will be meaningfully lower than in 2019 as some consumers avoid traveling due to their fears of the virus. With Americans driving less, fewer new vehicles will be bought. That trend will hurt Tesla and Tesla stock.
Another macro trend that will negatively affect Tesla is the recession. Elon Musk’s cars aren’t cheap at all, and a significant number of small business owners who may have bought a Tesla before the recession will no longer be able to do so.
Oil Prices and China-U.S. Tensions
Solar energy stocks have taken it on the chin this year, partly because of the plunge of oil prices. Yet, since oil is rarely used to generate electricity, oil is not a substitute for solar. As a result, the correlation between solar stocks and oil makes little sense.
The exact opposite is true for Tesla and Tesla stock. Gasoline-driven vehicles are indeed a direct substitute for Tesla’s vehicles. And I have little doubt that the exceptionally low price of oil will deter thousands of people from buying one of Tesla’s vehicles. And yet, as I mentioned earlier, the company’s shares have surged 81% this year.
Meanwhile, the shares probably bake-in strong demand for Tesla’s vehicles in China. But U.S.-China tensions have reached a fever pitch, with both Beijing and Washington accusing each other of being responsible for negligence or worse in handling the pandemic.
In that atmosphere, I think Tesla’s sales in China will be quite limited. If CEO Musk followed in General Motors’ (NYSE:GM) footsteps and sold his vehicles in China through joint ventures with Chinese automakers, I’d be much more hopeful about the company’s outlook in the Asian country. But given Musk’s tendency to “go it alone,” I don’t expect that to happen.
Over the medium term and the long term, Tesla’s competition looks poised to intensify. GM has created batteries with a range of up to 400 miles. It’s also slated to launch a new version of its fairly popular Bolt EV later this year. Further, it’s working on an electric version of its Hummer and has already started producing an autonomous electric vehicle. BMW is developing a new luxury electric car, and Toyota has developed a lineup of affordable plug-in hybrid vehicles.
Valuation and Bottom Line on TSLA Stock
Despite all of its challenges, Tesla’s shares are trading at a price-sales ratio of 5.43 and a forward price-earnings ratio of 131.6. By contrast, Toyota has a price/sales ratio of 0.6 and a forward P/E ratio of 7.9. GM has a price/sales ratio of 0.24 and a forward P/E ratio of 6.3.
The bottom line on Tesla stock is that, given all of the challenges it’s facing at this point, its valuation is just too high.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any of the aforementioned securities.
