Shares of EV major Tesla (NASDAQ:TSLA) have experienced extreme volatility over the last year, ranging from a 52-week low of $167 to a high of $488 per share.
With prices fluctuating so wildly, it’s worth asking whether the company’s stock is overvalued or undervalued.
Today, let’s take a look at some of the trends that could affect Tesla’s long-term performance in the context of the outlook for growth in the booming EV market.
How Is Tesla Valued Today?
To say the least, Tesla’s current valuation will demand very high levels of growth from the company going forward.
Shares of TSLA are priced at 186x earnings, 12.4x sales and 175x operating cash flow. Even analysts have soured somewhat on Tesla’s valuation.
The consensus price target for the stock at the moment is $299.38, implying a further downside of almost 12% from the latest price of $339.34.
Tesla Now Faces Increased Competition
One of the biggest headwinds for Tesla at the moment is the increase in competition among EV makers. Many legacy automakers, including the likes of Volkswagen, Ford, Mercedes and BMW, have rolled out successful EV lines that have eaten into Tesla’s once-unchallenged market position.
Easily the largest problem for Tesla on the global stage, though, is its Chinese competitor BYD. The company has leapfrogged Tesla to become far and away the largest EV maker in the world with almost double Tesla’s sales.
BYD is also attempting to expand in Europe, though its vehicles still aren’t available in America and likely won’t be anytime soon due to trade tensions between the US and China. Even with Tesla likely to remain dominant in the US, BYD represents a clear challenge to it in most other large markets.
Elon Musk’s Damage From the Political Arena and How it Relates to Tesla’s Long-term Performance
Reputational harm doesn’t always have a direct impact on sales, but in Tesla’s case there’s strong evidence that Elon Musk’s association with the Trump administration has done active harm to his company.
In Europe, for example, April data showed a 49% decrease in Tesla sales from the previous year. Backlash has also materialized in the United States, resulting in a greatly diminished brand image for the company.
Although some of this decline can be attributed to the greater competitive pressures described above, Musk’s leadership role in the company also appears to be in part to blame for this decrease in sales.
Given that Musk has publicly stated his intention to remain at the head of Tesla for at least another five years, it seems likely that residual brand damage could continue to plague the company’s performance through much of the next decade.
Tesla Is Still a Major Force in a High-Growth Industry
Even though Tesla’s market share has declined as competition encroaches on Musk’s blue ocean, Tesla still accounts for over 40% of American EV sales. From China, BYD has grown as a serious competitor and Musk & co have stated publicly they don’t pay attention to rivals but perhaps they should.
The EV market is slated to mushroom over the coming 15 years. Current estimates suggest that passenger EV sales will climb to 30 million as soon as 2027 and then soar by up to 73 million by 2040. As EVs steal ever larger shares of the vehicle market, Tesla will surely see steady long-term growth.
Over the next 3-5 years, analysts expect earnings per share rise at an annual rate of 21%. With EV growth expected to persist at a high rate through 2040, Tesla is very likely in for another decade of sustained earnings increases.
Like so many rivals, Tesla is also implementing price cuts to make its vehicles more attractive to consumers. Lower vehicle prices will spur demand, especially at a time when consumers are being pressured by inflation and an uncertain economic outlook.
Is Tesla Overvalued or Undervalued?
Tesla stock is overvalued according to the consensus price target of analysts who place fair value at $299.38 per share.
While there’s still a lot to like about Tesla’s EV business today, the stock’s valuation seems untenable in light of growing competition, weaker international performance and many argue brand damage from Musk’s political affiliations.
Even though it seems all but certain to keep growing over time as the US EV market balloons in size, it seems that it would take an absolute best-case scenario for Tesla to justify the prices investors must pay to buy its shares today.
Tesla’s valuation currently reflects expectations of deeply speculative projects that aren’t tied to the strong fundamental growth of the EV market. Projects like the company’s Optimus humanoid robots and its planned fleet of robotaxis still have enromous obstacles to clear before they can start adding to the company’s top or bottom lines.
Such projects may excite longtime Tesla bulls, but they add little to the company’s intrinsic value until they prove themselves commercially.
To get a sense of just how expensive Tesla is, a discounted cash flow analysis assumes the optimistic case of a 21% earnings growth rate for the next 15 years and a 7% growth rate thereafter.
Using these numbers and a discount rate of 10% to reflect the long-term average returns of the S&P 500 as a benchmark, Tesla shares would still only be worth about $335 today. This suggests that the stock is priced with a best-case scenario in mind. Under even moderately more adverse conditions, it seems that there would be far more downside than upside in TSLA shares.
All told, Tesla may be an incredible business, but its stock price today simply appears too high. Unless the company can reverse the erosion of its market share that has taken place as more competitors have moved into the EV space, it seems very likely that TSLA shares could be significantly overvalued at the moment.
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.