Up 155% from April Lows, Why One Analyst Says Tesla Stock Is a Sell

Tesla (TSLA) has experienced a meteoric rise since its third-quarter earnings report, further ignited by the post-election rally. The stock has climbed over 45% since the Nov. 5 presidential election, as investors bet that CEO Elon Musk's backing of President-elect Donald Trump will pay off with favorable regulatory shifts under the new administration. 

This wave of market enthusiasm has propelled the company back into the trillion-dollar club, with a current valuation of $1.12 trillion, and the shares have now soared 155% from their April lows. 

However, the stock has yet to win over all of its skeptics. In a recent note, one analyst reiterated a “Sell” rating on the electric vehicle (EV) giant, arguing that the recent rally "is mostly driven by animal spirits.” 

Is Tesla Stock Overvalued? 

Tesla’s momentum remains undeniable. The stock has surged more than 100% over the past six months and is up 155% from its April lows. Despite this impressive rally, Tesla’s share price is still 15% below its all-time high from three years ago. 

While the long-term gains, nearly 1,400% over the past five years, are remarkable, the future appears less certain. Factors such as potential regulatory rollbacks on outsourced manufacturing and the shifting economics of EV production could pose challenges.

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Currently, Tesla’s stock is trading at a lofty 140 times forward earnings, substantially higher than the sector median of 15x and its own five-year historical average of 113x. At these levels, Tesla stock appears to be significantly overvalued. Even if its price declined to the Wall Street median target of $241.56, Tesla’s P/E ratio would still hover at an elevated 75x, well above industry norms. 

Adding to its woes, analysts forecast Tesla’s revenue to grow by an average of 15% each year through 2027, a sharp slowdown compared to its historical growth rates. If these projections hold true, the current valuation seems stretched, leaving little room for underperformance or unforeseen challenges. 

Tesla's Slower Growth Doesn't Justify Its Valuation

On Oct. 23, Tesla reported its third-quarter earnings, with sales coming in at $25 billion, just shy of analysts’ expectations. While this marked an 8% year-over-year increase, it represented a 2% sequential decline. Automotive revenue rose by 2%, while storage revenue surged by an impressive 52%.

The company’s profitability remains strong, with net income rising from $1.85 billion a year ago to $2.16 billion. Despite maintaining an impressive net margin of 13%, Tesla is facing challenges with delivery numbers.

In 2023, Tesla’s vehicle deliveries grew by 38% year-over-year, reaching 1.8 million units. Growth started to slowed in 2024. In Q2 2023, Tesla produced 479,700 vehicles and delivered 466,140 vehicles. By Q2 2024, those numbers were down to 410,831 and 443,956 respectively. 

Some investors are taking Q3 2024 as a turning point, however. Q3 figures came in at 469,796 vehicles produced and 462,890 vehicles delivered, up from 430,488 vehicles produced and 435,039 vehicles delivered in Q3 2023. What comes next for the electric vehicle company will be key for investors to watch. 

What's Next for TSLA Stock?

Tesla is under pressure in China due to declining sales and intense competition from local manufacturers like BYD (BYDDY), Nio (NIO), and Li Auto (LI). BYD nearly matched Tesla’s Q3 2024 global figures with 431,603 EV deliveries in China during the same period.

Additionally, Tesla’s market share in key regions such as Europe has been shrinking, with new registrations dropping by over 20% in October. The industry-wide softening of EV demand, coupled with the lull between major model launches, has further exacerbated the situation.

For Q4, Tesla management refrained from giving specific guidance, but Musk indicated that deliveries, even with the addition of new models like the Cybertruck, would likely be lower compared to last year.

During the Q3 earnings call, Musk also shared plans to introduce a robotaxi service in Texas and California by next year. While achieving fully driverless taxis within that timeframe poses a significant challenge, Tesla’s management expressed confidence, noting that testing is currently underway with human assistance.

What Do Analysts Say About Tesla Stock?

UBS analyst Joseph Spak has raised concerns about the stock’s overvaluation, maintaining a “Sell” rating even after lifting the stock's price target by 15% to $226. Spak cautioned that “the rise in Tesla stock is mostly driven by animal spirits/momentum, which has happened multiple times in TSLA's history."

Among 38 analysts, Tesla has a consensus rating of “Hold,” with a breakdown of 11 “Strong Buy” ratings, 2 “Moderate Buy,” 16 “Hold,” and 9 “Strong Sell” ratings. 

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As Tesla has already gained significantly in 2024, the shares risk a significant correction if the EV giant can't justify its forward valuation metrics. 

However, some bulls do believe that Trump's incoming second term could significantly benefit Musk and Tesla, especially if the company meets its projected deadlines for its robotaxi service. With that in mind, Stifel analyst Stephen Gengaro recently raised his price target from $287 to $411. 

For most investors, this may continue to be a wait-and-see story.