Home / Markets News & Opinions / Wall Street Researcher Rings The Tesla Stock Alarm – And He’s Right

Wall Street Researcher Rings The Tesla Stock Alarm – And He’s Right

Last Updated September 23, 2020 2:28 PM
Simon Chandler
Last Updated September 23, 2020 2:28 PM
  • New Constructs CEO David Trainer claims Tesla stock’s realistic valuation ought to be a tenth of its current price.
  • Trainer points out that Tesla is overpriced even under scenarios where it becomes the world’s biggest carmaker.
  • A big collapse in Tesla’s price is due, but predicting when it will fall is foolhardy, especially when price is often driven by the “greater fool” theory of trading.

Tesla stock is set to fall to only 10% of its current price, according to a prominent Wall Street researcher. New Constructs CEO David Trainer says that Tesla’s stock price of $418 implies an all-but-impossible market share and that the carmaker can’t keep on defying economic fundamentals forever.

Trainer’s research suggests that even if Tesla does end up becoming as big as Toyota in terms of sales, this still wouldn’t justify its $390 billion market cap. So regardless of whether you think Tesla will become the most profitable carmaker in the world or will remain a relatively niche brand, a significant collapse is coming.

Tesla Stock Is ‘Really’ Worth Only 10% Of Its Current Price

Speaking to CNBC’s Trading Nation, David Trainer said that Tesla’s stock price is completely irrational , irrespective of what the future holds for the Elon Musk-fronted company.

Whatever best-case scenario you want to paint for what Tesla’s going to do — whether they’re going to produce 30 million cars within the next 10 years … and have the same high margins as Toyota … even if you do believe all that is true, the stock price is still implying that profits are going to be even bigger than that.

Trainer added that the average selling price of Tesla stock implies a future market share of anything between 40% and 110%. Its current projection of 10.9 million car sales by 2030 — at an average price tag of $57,000 — indicates a market share of only 42%.

Tesla vehicle deliveries
Tesla has delivered around a million vehicles to date, and expects to deliver 10.9 million by 2030. | Source: Tesla 

This means that Tesla now trades at around 159 times its forward earnings. Its massively overpriced, whichever way you look at its future, and Trainer warns of a big comedown.

We think this is a big, big – one of the biggest of all time – house of cards that’s getting ready to fold.

Trainer predicts that, eventually, the market will realize Tesla’s valuation isn’t supported by its fundamentals. He expects the stock to fall to a tenth of its current price, which currently stands at $418.

Tesla doesn’t rank in the top 10 in market share or car sales in Europe for EVs and that’s because the laws changed in Europe that have strongly incentivized the incumbent manufacturers to crank up hybrids and electric vehicles. The same is coming in the United States.

Correction, But No Collapse (Yet)

The market is increasingly listening to naysayers like Trainer. Since hitting a peak of $498.32 on Monday, Tesla stock has since fallen to $418.32. This is a fall of 16%, meaning that the stock has officially entered a correction.

Tesla stock chart
Tesla’s stock may be moving towards bear market territory. | Source: Yahoo! 

Other financial commentators have also crunched the numbers, finding that Tesla would need to earn net annual profits of $26.4 billion by 2030 to justify a price-to-earnings ratio of only 25 . It lost $862 million in 2019, and currently has a price-to-earnings ratio of 1,083 .

It’s obvious that something has to give. This is particularly the case when Tesla’s EV market share is declining in regions such as Europe. In Germany, its share fell from 18.4% in 2019 to 8.7% in the year to July 2020 .

Tesla Germany EV market share
Tesla is losing ground in Europe, which has overtaken China as the biggest EV market. | Source: WOLFSTREET.COM 

While common sense dictates that Tesla will fall hard, it’s still difficult to predict when exactly this will happen. Tesla may never be able to justify its current price, but we also know that the stock market isn’t simply about fundamentals.

It also operates according to the “greater fool theory.” So for as long as people think they can sell Tesla higher to someone else, they’ll continue to buy it.

Disclaimer: The author holds no positions in the securities mentioned in this article.