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Tesla’s (TSLA) valuation - or what some would call “gross overvaluation” - has always been a sore point between bulls and bears. The Elon Musk-run company’s current market cap is $811.59 billion - which, for context, is over three times that of Toyota Motors (TM), the second-biggest automaker by market cap.
At its peak in 2021, Tesla was valued at more than $1.2 trillion, and even the combined market cap of the world’s biggest automakers couldn't approach that level. Incidentally, never in history has an automaker’s market cap surpassed $1 trillion.
Tesla Stock Forecast
It's not unusual for analysts to have differing opinions about a particular stock, but the kind of dispersion that we see in Tesla’s target price is quite high. For instance, TSLA’s Street-high target price of $400 is over four times the Street-low target price of $85. Its mean target price of $250.32 represents a modest discount to its current market price, and the stock has a consensus rating of Hold from analysts.
Of the 26 analysts covering Tesla, 7 rate it as a Strong Buy, while 2 call it a Moderate Buy. Fourteen analysts rate it as a Hold, while the remaining 3 have a Strong Sell rating.
The divergence in analysts’ opinions can be attributed to how they perceive the company. Bears primarily value Tesla as an automaker, and end up assigning low target prices. However, bulls view Tesla as a tech company, and believe it should trade at higher multiples relative compared to legacy automakers.
Also, those who are bullish on Tesla stock believe that profits from the tech business – which includes autonomous driving – will drive the company's future earnings. Earlier this month, Morgan Stanley analyst Adam Jonas, a long-standing Tesla stock bull, created quite a furor when he said that the company’s Dojo supercomputer could add $600 billion to Tesla’s market cap. However, details about the project - which will aid autonomous driving - are scant, and Jonas had to issue an update to justify his bullish call.
Cathie Wood on TSLA
Cathie Wood – arguably the biggest Tesla stock bull – believes that the company is an AI play, and sees the stock rising to $1,400 by 2027 in the bear case and $2,000 in the bull case.
Her optimism revolves around Tesla’s autonomous driving business, which she believes accounts for two-thirds of the company’s value. Specifically, ARK Invest believes that Tesla could generate revenues of around $200 billion from robotaxis by 2027.
Musk Believes Tesla Can be the Biggest Company
Wood's views are in sync with Musk, who believes that Tesla's valuation is linked to its autonomous driving business. Musk argues that Tesla can be the biggest company globally, and during the company’s Q3 2022 earnings call, he said Tesla can be worth more than the combined value of Apple (AAPL) and Saudi Aramco. He did admit that it would be “difficult” and “will require a lot of work, some very creative new products, manage expansion, and always luck.”
Ashwath Damodaran Says Tesla Stock is Worth $130
Ashwath Damodaran, Professor of Finance at the Stern School of Business at New York University - who's earned himself the title of the “dean of valuation” - valued Tesla stock at $130 per share in January.
According to Damodaran, Tesla cannot sustain high margins as it ramps up deliveries. Notably, Musk believes Tesla’s production capacity will rise to 20 million units by 2030 - and even though the billionaire tends to be flamboyant at times, it's worth pointing out this targeted capacity would be twice the annual sales of Toyota, which is the world’s largest automaker by shipments.
Tesla’s recent price cuts, which have sparked an industry-wide price war, are a testimony to the fact that maintaining high margins might not be easy for Tesla. The company’s operating margins are already down to single digits, even if they are still among the highest in the industry.
Valuing Tesla Stock: Look Beyond the Automotive Business
Musk has countered the margin erosion due to price cuts, having said that Tesla can sell cars without making any profits and later make up by selling autonomous technology. The company is also open to licensing its autonomous driving technology to other automakers, and has already started sharing its sprawling network of Superchargers with peers like Ford (F), General Motors (GM), and Rivian (RIVN). These automakers will also transition to Tesla’s North American Charging Standard (NACS), thereby making it the de facto industry standard in the U.S.
Meanwhile, no matter how bears may view the company, there is a wide army of Tesla (and Musk) fans who are in love with TSLA, and buy any dip in the stock. Tesla bears have had a tough time since 2019, as the stock has risen exponentially since then, and bearish analysts have had few options but to gradually raise the stock’s target price.
Is Tesla Stock Overvalued?
Even Damodaran admitted in his note that “I have been wrong, and sometimes hopelessly so, in some of my earlier valuations of Tesla.” He also acknowledged that software forms “an integral part of a Tesla automobile.”
In my view, Tesla is much more than an auto company, and is a play on multiple themes - like renewable energy and autonomous driving. Musk has big plans for Tesla’s energy business, and believes its revenues will rise in the coming years.
I believe that whether Tesla is overvalued or not will eventually depend on the software side of the business – including the full autonomy of Tesla cars. In reality, though, Tesla’s full driving (FSD) is not yet as “fully autonomous” as the name suggests. For the last several years, including in 2023, Musk has promised full autonomy “by the end of the year” - but the FSD remains far from fully autonomous.
On the valuation side, the company might see structural margin erosion over the next few quarters as it faces the tough choice between increasing shipments and maintaining margins – and so far, it has opted for the former, as it strives to grow deliveries at the CAGR of 50% that Musk has touted multiple times.
Even in autonomous driving, it remains to be seen how Tesla’s technology will stack up against that of other companies like Waymo and Cruise, which are respectively backed by Alphabet (GOOG) and General Motors.
Overall, I believe that Tesla stock looks overvalued at these levels, especially as consumers get spoiled for choice amid the widening list of EV options. However, I will always be wary of shorting the stock, as its price movement can often be at odds with the company's fundamentals.
On the date of publication, Mohit Oberoi had a position in: RIVN , F , GM , AAPL , GOOG . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
