How High Is Too High for Tesla’s Stock Price?

Tesla has had a scintillating run since Election Day with the stock rallying from the low $220 region all the way towards $350+ in a matter of days.

Having run so far so fast, what are the odds Tesla share price is set to correct soon? How high is too high for Tesla stock price?

The current share price suggests high probability of a short-term pullback given that it has blown past its upper Bollinger Band and skews are at extreme levels.

But will the stock keep powering higher over a longer time period even if it does have a temporary setback?

Catalysts Driving Tesla Share Price Higher

Elon Musk’s alignment with Donald Trump is a key tailwind not just in the short-term but likely the longer term for Tesla share price.

The support Musk offered Trump during election season is likely to be returned in kind with administration support for electric vehicle adoption through tax credits, infrastructure spending, and regulatory incentives. It certainly seems clear that investors are pricing in expectations of continued growth in EV adoption and government subsidies.

A key to Tesla’s success has been Musk’s ability to scale its manufacturing. In the most recent quarter, Tesla reported vehicle deliveries of 386,000, representing a year-over-year decline of 8.5%.

But keep in mind that was a decline off an already extremely high number. And with production facilities ramping up in Berlin and Texas, Tesla’s leadership team has set awfully ambitious targets for the coming years.

The company aims to produce 5 million vehicles annually by 2025 and EVs are just the tip of the iceberg of the Tesla investment story. Tesla’s energy storage and solar business are gaining traction, with energy storage revenue accelerating by 52% year-over-year in the most recent quarter, driven by increased deployments of Powerwalls and Megapacks.

Plus, Tesla’s software revenue, including Full Self-Driving subscriptions, is increasingly becoming a meaningful contributor to the tune of hundreds of millions of dollars.

Are Fundamentals Justifying the Valuation?

After rallying by a full $130 points in less than 5 trading days, it’s fair to say that Tesla has made a monstrous move and is likely due for, at minimum, a pause from the $350 level, if not a more meaningful pullback

Tesla trades at a price-to-earnings ratio of 87x now, which far supersedes the ratio of an ordinary car manufacturer but then again Tesla is not a simple automaker. It has so many divisions that are commercialized that it really stands in a category all by itself.

Musk has described Tesla as being more akin to a company like Apple than an automaker in the sense that the company is software-first and the hardware simply acts as a host for the software, meaning FSD.

At a trillion dollar plus market capitalization, it’s easy to argue that Tesla is overvalued. But the optionalities it possesses under the hood are what keep investors so excited from Optimus to Robotaxis. And so while Tesla has failed to deliver a single quarter of revenue growth in the double-digits over the past 5 quarters, it’s important to remember that substantial revenue catalysts may lie on the horizon.

With all that said, it’s worth keeping in mind that the consensus among 43 analysts is for Tesla share price to plateau at a fair value of $224.94 per share, which it has long since left in the dust.

So, expect analysts upgrades to start chasing the share price higher now, which in turn could lead to further TSLA price support.

Can the Rally Be Sustained?

Global EV sales are expected to grow at a CAGR of 13.8% annually through 2032, and Tesla remains the dominant player in this market, with a market share of 48.9%.

As it advances battery technology, autonomous driving, and manufacturing efficiencies, margins are likely to expand and the current price-to-earnings multiple will likely be re-rated in favor of the bulls.

With that said, rivals like BYD in particular, as well as Ford, and Volkswagen are aggressively expanding their EV lineups and so no doubt they will look to claw away the share of market Tesla currently enjoys. 

Those headwinds lie on the horizon in the medium to long-term but in the short-term the natural flow of the market is to see sellers take profits after such a big run-up. That’s not necessarily a negative or will signify a dampening in sentiment or a major shift to the downside. 

How High Could Tesla Share Price Go?

If analysts are to be believed, Tesla share price now has substantial downside risk to $240 per share. 

Even a fair value assessment using a discounted cash flow forecast analysis is not much more optimistic and pegs fair value at $265 per share.

Those numbers are functions of current earnings and revenue growth rates which are somewhat anemic. But trading well means looking to the future and the next administration is likely to be supportive to Musk in making faster regulatory moves.

That seems to be what the share price is factoring in now and when you add the additional growth levers yet to be realized in terms of Optimus and robotaxis, the current share price may be much more reflective of reality than prior targets.

Has Tesla’s Stock Run Too Far, Too Fast?

Tesla’s recent rally appears to be driven more by sentiment and the expectation of fewer regulatory hurdles and lawsuits to navigate than pure fundamentals.

But make no mistake about it, removing those headwinds frees the firm to focus on the nuts and bolts of the business more so than the outward battles and should in turn lead to higher margins, faster growth and a re-rating by analysts.

So, short-term a pullback or pause may be due but the momentum remains sharply with the bulls in the medium-term and as has been clear by those betting against Tesla, it’s a risky proposition to take a bearish view. Over the past week alone, short Tesla investors have suffered tremendously and fueled a short-squeeze rally. That may be fading and when it does the fundamentals will need to lead once again.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.