Is Tesla Stock Overvalued?

Tesla Inc (NASDAQ:TSLA) is a media darling company with a rabid fanbase.

The company led by CEO Elon Musk not only spearheaded the manufacture of all-electric vehicles (along with the hybrid market), but it also works with Musk’s other companies (SpaceX and The Boring Company) to create a network of EV charging stations, solar panels, and home charging solutions, along with building underground expressways to serve as the road itself. This made it the most valuable car company in the world, but some are wondering – is Tesla stock overvalued?

It’s not an easy question to answer in the turbulent economy of 2020. Let’s dive into Tesla’s assets, revenues, and business plans to decide if it’s worth the investment, starting with how it got where it’s at in the first place.

Why Tesla Stock Went Up?

Tesla’s IPO stock price was $17 per share, and it increased to the $50 range before skyrocketing in 2020 to over $400 per share.

This occurred for a variety of reasons. First Musk has been an outspoken opponent of municipal shutdowns, even threatening to relocate California’s operations to pressure Governor Gavin Newsom to reopen.

The vocal CEO constantly makes headlines, and it’s unlikely to sway fans of the company’s biggest release heading into 2021 – the Cybertruck.

This all-electric truck reportedly has over 650,000 pre-orders, which is worth over $30 billion for the company. It also experienced a boost when the company reached the eligibility requirements for induction into the S&P 500.

While it has not yet been included in the index, it most likely will at some point over the next decade. That makes it possibly an integral part of the U.S. economy.

As the world heads toward a likely recession in 2021-2023, Tesla has an opportunity to help carry the market.

It’ll need strong financials to do so, however, so let’s dive deeper into those.

Do Tesla Financials Justify TSLA Market Cap?

As of July 2020, Tesla has four straight quarters of profitability. That’s right – although the company has been around for nearly 20 years, it only just started earning a profit in 2019.

In the second quarter of 2020, it earned $104 million in net income off $6 billion in revenues, beating analyst expectations by a large margin.

That was the final quarter necessary to meet the minimum requirements for entry into the S&P 500, which we’ll discuss more below.

The company sold 367,500 cars in 2019, which is a 50 percent increase from the prior year. The company estimates it sold 90,650 during the second quarter, with 80,000 of those being Model 3 and Model Y units.

It manufactured over 82,000 vehicles in this timeframe. These are respectable sales numbers but only represent a small portion of the automotive market. Larger competitors are also competing directly in electric vehicles.

Tesla’s market cap heading into Battery Day and its 3rd quarter earnings report is over $400 billion, and that leaves many wondering if now’s a good time to invest?

Is Tesla Valuation Too High?

We’ll need to examine the other car manufacturers to determine if Tesla is overpriced.

Its three biggest competitors by market cap are Toyota (NYSE:TM) at over $200 billion, Honda (NYSE:HMC) at $40-50 billion, and General Motors (NYSE:GM) at $40-50 billion.

This puts Tesla’s valuation approximately equal to all three of these companies combined.

In the first half of 2020, Toyota sold 1,097,767 vehicles, while Tesla sold fewer than 200,000, and those sales account (along with service) accounts for 94% of revenues and 98% of gross profits.

Toyota’s 2019 revenue was $272 billion off 10.74 million units sold, and Honda generated $143.1 billion off 5.323 million vehicles sold in 2019. These numbers dwarf the $24.6 billion Tesla generated in 2019 and any expectations for 2020.

It’s hard to believe it can sustain this valuation with so fewer cars on the road and very little enterprise fleet revenue.

Tesla’s valuation far exceeds its revenue, and it’s putting all its money into R&D, business acquisition, and growth opportunities. Because it doesn’t pay dividends, it’s hard to recommend buying into such a bubble.

Will Tesla Stock Drop?

The biggest reason Tesla’s valuation is so high is because of its qualification for the S&P 500, but it’s important to note that it’s not guaranteed inclusion.

It now needs to outperform the existing components to prove it has longevity. This is important because the S&P 500 index is part of a lot of people’s investment portfolios. Each component is a well-established company and it is supposed to represent the health of the entire market.

It could be years before it’s finally inducted, and the economy appears to be headed toward a downward slide over the next few years.

Tesla stock is likely to drop, but the hype from Musk’s Battery Day should carry it through the remainder of 2020.

The only question is whether TSLA share price can outperform the rest of the market and slow its deflation over the next few years by delivering on its orders and utilizing its Gigafactories to their full potential.

Is Tesla Stock Overvalued? The Bottom Line

Tesla’s valuation is more than the combination of its competitors Honda, Toyota, and GM. While its unique sales model and network of Supercharger stations can account for some revenue, it pales in comparison to the sales volume and revenue generation of its larger competitors. However, it’s still a much younger company and bullish investors appear focused on its potential in the future.

In the 2010s and 2020, Tesla’s sales numbers are relatively small compared to other auto manufacturers. All signs appear to show that TSLA is overvalued for the time being.

Even the S&P 500 board is holding off, as it wants to show companies on their way up, not down. Wait at least another five years, if not longer, before adding it to your portfolio.

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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.