Home / Opinion / These 2 Key Metrics Suggest Tesla’s Stock Is Extremely Overheated

These 2 Key Metrics Suggest Tesla’s Stock Is Extremely Overheated

Last Updated September 23, 2020 2:04 PM
Joseph Young
Last Updated September 23, 2020 2:04 PM
  • Tesla is being fueled by a FOMO rally from Robinhood traders, according to Bloomberg data.
  • More than 457,000 individual traders now hold TSLA stock.
  • Analysts warn that the company’s current valuation is high relative to its earnings and book value.

Tesla’s (NASDAQ:TSLA) stock continues surging to new record highs, but two key factors suggest the rally is overheated.

Tens of thousands of day traders on Robinhood are fueling a “Fear Of Missing Out” (FOMO) rally around Tesla. It might leave the stock vulnerable to a potential correction when the positive sentiment subsides.

The Tesla stock is also pricing in 166 times the predicted earnings in 2021, according to market analyst Holger Zschaepitz. Compared to traditional car makers like Toyota, Tesla has a much higher valuation relative to earnings.

tesla stock price
Tesla’s stock has surged over the past year. | Source: Yahoo Finance 

Robinhood Traders Are Fueling a Massive FOMO Rally

On July 13, 40,000 Robinhood traders bought TSLA in a single hour , Bloomberg reports. Tesla’s share price surged 16% as a result before reversing gains later in the day.

Tesla’s extreme volatility on Monday gives us a glimpse into its near-term trend.

When an asset is overly bought or shorted, it raises the likelihood of an institutional selloff or a short squeeze. It causes the market to sway to one side, incentivizing investors to take advantage of heightened liquidity.

Tesla is already owned by 457,000 Robinhood users. By comparison, 358,000 Robinhood users own shares of Amazon.

The handling of the pandemic and the future of the U.S. economy remain in doubt. In a highly uncertain period, some analysts warn that such a high-profile FOMO rally could result in a correction.

Adam Jonas, a transportation analyst at Morgan Stanley, said Tesla’s days of dominance might be numbered . With a target of $740 for the stock, Jonas wrote:

The days of Tesla’s virtually unchallenged dominance may be numbered.

Tesla is Valued Much Higher Than its Competitors

Holger Zschaepitz, an analyst at Welt, reported that Tesla’s stock is pricing 20 times the book value of the company . By comparison, Toyota’s stock reflects 91% of the Japanese manufacturer’s book value:

Just to put things into perspective: Tesla is priced at 6,348 times 2019 earnings. Stock is priced at 166 times 2021 earnings, 20 times book value, & 7 times sales. Toyota, the biggest auto company by market value after Tesla, sells for 61% of sales & 91% of book value.

Auto companies by market cap. | Source: Holger Zschaepitz 

A common argument from the bulls to support the high market valuation is that Tesla is a tech company, not a conventional car manufacturer.

Eli Burton, the founder of a local Tesla community, pointed out in February 2020 that the company produces software, battery tech, and autopilot chips. 

He said (via Twitter) :

They won’t be tech companies until they get serious about software. Tesla has 3 main prices of tech they develop: battery tech, onboard software, and autopilot. Tesla insurance is also an extension of their technology play through leveraging their data on driver behavior.

For now, the market seemingly perceives Tesla as more than a car maker. Whether the explosive trend of the company’s stock can continue remains unclear. Analysts are divided on the justification of the firm’s high valuation relative to its earnings and book value.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.