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2 Factors Why Sky-High Tesla is a Massively Overvalued Stock

Last Updated September 23, 2020 1:30 PM
Joseph Young
Last Updated September 23, 2020 1:30 PM
  • Tesla is overvalued at $92.55 billion and has an extreme premium.
  • Its earnings to valuation ratio is almost 10 times bigger than traditional carmakers.
  • TSLA continues to be the most shorted automaker stock, and that’s a positive for the company.

Tesla (NASDAQ: TSLA) is valued at $92.55 billion. That is just $8 billion short of the market cap of Volkswagen , the second-largest carmaker in the world behind Toyota. All the numbers point toward a highly inflated valuation, worrying investors.

Sign #1: Extremely high premium on earnings

As of January 15, Tesla had an EV/EBITDA ratio of 20.2 times , significantly higher than other major carmakers. Daimler (Mercedes), BMW, Volkswagen, Ford, and GM all have a ratio of fewer than 2.5 times.

The EV/EBITDA ratio demonstrates the earnings or revenues of a company relative to its valuation. Tesla’s extreme premium indicates investors are primarily looking at its growth potential over its current earnings. 

Still, even when Tesla’s completed Gigafactory in China and the construction of its fourth Gigafactory in Germany are considered, the earnings to valuation ratio is simply too high to be sustained.

Tesla Gigafactory, Tesla
Tesla put together its massive production factory, titled ‘Gigafactory 3’ in Shanghai, launched in 2019. | Source: Reuters/China Stringer Network

The reason why Tesla has been able to secure such a high valuation over the past several months is that it is miles ahead of traditional carmakers in the electric vehicle industry. 

There is a strong perception that Tesla is more of a software company rather than a carmaker,  which has contributed to the rapid expansion of the firm.

Sign #2: Off of hopium on U.S.-China deal

Tesla was arguably the biggest beneficiary of the phase one deal between the U.S. and China  alongside Apple.

In mid-2019, the company faced a major roadblock for its operations in China. It was forced to sell cars at nearly three-fold the price in the U.S., and the price range was too high to attract local consumers. 

After the agreement of a phase one deal, Tesla was able to lower the price of the Model 3. In the imminent future, the firm has said it will work with local suppliers to even lessen the price of its flagship models. 

Coming off the finalization and signing of the phase one deal, the stock market spiked and the Tesla stock surged by 4.7 percent.

Seth Weintraub, award-winning journalist at Electrek, said he had sold all his shares in Tesla on January 9, citing “surreal valuation.”

tesla valuation
Source: Twitter 

There are fears that the phase one deal is overhyped  in that it can still lead to more tariffs down the line. That poses a threat to the valuation of Tesla in the short-term.

Tesla can still continue to climb due to this variable

Elon Musk has said many times that he is not bothered by the stock market nor short sellers of the stock.

Short sellers have been the single biggest catalyst of Tesla’s bullish rally throughout the past six months.

While shorts can add selling pressure, when short contracts go underwater as the stock rises, it forces traders to close or reduce their positions. That turns into market buy orders, which then becomes buying demand.

A bubble that does not pop is not a bubble. If the Tesla valuation can be sustained at this level through aggressive expansion of Gigafactories and unexpectedly high sales of Model 3s, it could continue to grow despite the clear overvaluation.