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What’s behind Tesla’s (NASDAQ:TSLA) stock surge and is it justified?
Tesla (NASDAQ:TSLA) stock won in the last few weeks after exceeding second-quarter delivery expectations. The company run by Elon Musk saw its shares rise 40.9% in the last 30 days and now trades at some huge valuation multiples. I’m still neutral on Tesla as I appreciate that Robotaxi and robotics could be game-changing for the business, but the valuation is hard to justify.
A Resurgent Tesla
In the second trimester, Tesla deliveries down 4.8% year-over-year (YoY)But that was better than the market expected. In the three months to June 30, Tesla delivered 443,956 vehicles, representing a 14.8% increase from the first quarter. The stock has rallied since then, with positive numbers across the electric vehicle (EV) sector suggesting resurgent demand.
Tesla shares had already begun to rise in June after shareholders voted to give Musk his $56 billion pay package in 2018 and reincorporate the company in Texas. The news sent Tesla shares jumping more than 10%, taking them above $200 per share.
Is Tesla’s rise justified?
As an automaker, Tesla is clearly overvalued. Even Elon Musk has urged investors to value Tesla as a robotics or artificial intelligence (AI) company rather than one that focuses purely on producing road-going vehicles — even if they are electric. As such, some analysts may question why Tesla, which was already trading at high multiples, has surged on the back of these improved EV deliveries. It’s a good point.
The stock is currently trading at 96.4x forward non-GAAP earnings, making it the most expensive EV stock by many multiples and one of the most expensive tech companies. Furthermore, the expected earnings growth rate for the next three to five years is just 11.2%, inferring that analysts see very little tangible impact from the Robotaxi business in the medium term.
In turn, this leads to a price-to-earnings-to-growth (PEG) ratio of 8.7x. This is well beyond what is typically considered attractive (1.0x or less).
Other metrics compound this unattractive valuation. The stock trades at 8.3x TTM sales and 7.9x forward sales, representing an 830% and 813% premium to the industry, respectively. Tesla’s price-to-forward cash flow ratio of 63.9x also represents a 585% premium to the broader industry.
However, Musk has been teasing two major developments that are expected to take place in the next 18 months. The first is the long-awaited Robotaxi – set to be unveiled on August 8 – and the second is the sale of its Optimus robots, which could begin in the second half of 2025.
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What could these developments mean for Tesla?
Self-driving offers Tesla the opportunity to dominate an exciting new segment. From the outside looking in, Tesla appears to be ahead of the game when it comes to automation. We’ll know more on August 8. Even Nvidia (NASDAQ:NVDA) CEO Jensen Huang agrees, noting recently that Tesla was “way ahead” in self-driving technology.
Robotaxis will allow Tesla to open up new revenue streams. Unsurprisingly, one of them would be ride-hailing. In 2023, 76% of Tesla’s revenues were generated through car sales, with another 8% generated through services. Only 5.8% or $6 billion was earned through its Energy Generation and Storage division. Ride-hailing also promises to have large margins.
Despite the potential of robotaxis, I’ve seen very few analyst forecasts that actually attempt to quantify that potential. Cathie Wood’s ARK is an exception. According to ARK Invest, nearly 90% of Tesla’s profits will be attributable to the robotaxis business by 2029. In ARK’s bearish scenario, the autonomous transportation business would generate $603 billion in 2029. In its bullish scenario, that number rises to $951 billion. This, in turn, has led Wood’s hedge fund to suggest that the stock will be worth $2,600 in 2029.
It’s worth acknowledging that ARK Invest’s predictions have been dismissed by many as overly ambitious. For one thing, the global ride-hailing market is expected to be worth $215.7 billion by 2028 (according to Statista). That’s less than half of what ARK believes Tesla would generate from ride-hailing in its pessimistic 2029 case. I can only assume that Wood’s fund is inferring that autonomous vehicles will drive a major shift from car ownership to ride-hailing.
There are also questions about how Tesla could mass-produce a fleet of robotaxis large enough to generate the numbers projected by ARK. Assuming a production cost of between $150,000 and $200,000 (per ARK Invest), building a global fleet of robotaxis would likely cost trillions. Tesla doesn’t have the cash flow needed to build a global fleet.
Since Q1 earnings, Musk has also been touting Tesla’s potential in robotics, with “limited production” of its Optimus robot in 2025. According to Musk, robots could turn Tesla into a $25 trillion company. However, investing in Tesla for its robotics capabilities may be too speculative, given how little we know.
Is Tesla stock a good buy, according to analysts?
On TipRanks, TSLA is rated as a Hold based on 12 Buys, 14 Holds and eight Sell ratings from analysts over the past three months. average target price for Tesla shares is $180.92, which implies a potential downside of 26.57%.
Conclusion on Tesla shares
While Tesla is in pole position to dominate in the autonomous era, I remain cautious about Musk’s over-the-top promises. This makes it very difficult to support a stock that is currently trading at 96.4x forward non-GAAP earnings. It may be priced for perfection, and if Musk fails to deliver on August 8, the stock price could pull back significantly. That’s why I’m remaining neutral.