Why Tesla’s Stock is Overvalued

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Tesla’s stock value has increased over 1000% since March of 2020.

Whether because of its electric cars, the antics of eccentric CEO Elon Musk, or the company’s exciting technological advancements, Tesla is undoubtedly one of the most well-known and successful companies in today’s world. 

Although the global economy lies in shambles as a result of the COVID-19 pandemic, Tesla’s stock price has bucked the trends of competitors and surged in value. In fact, Tesla’s stock has risen so substantially that Musk has now amassed $188.5 billion, surpassing Amazon’s Jeff Bezos as the richest person in the world. In January 2020, Tesla’s stock traded at $102.70 a share. During the market freefall in March due to the COVID-19 pandemic, its stock dropped to its lowest and was trading at $70.10 in March. As of January 15, 2021, however, Tesla’s stock is being traded at a staggering $826.16, a 1,078.55% increase since March of 2020. 

Many Wall Street regulars, including Musk himself, find it difficult to understand why. I agree. Tesla’s stock price is overvalued, and tremendously so. 

For starters, Tesla sells a fraction of the cars that its fellow automotive counterparts do, yet it is still worth much more than they are. For instance, Toyota produces nearly 10.75 million vehicles annually, at a rate of a vehicle every three seconds. On the other hand, Tesla only made around 366,000 vehicles. However, Tesla’s price to earnings (PE) ratio (the ratio between the stock price and one dollar of the company’s earnings) is $1,575.64, whereas Toyota’s price to earnings ratio is only $16.22. The price of a stock should be proportional to the company’s earnings.  Tesla produces and sells considerably fewer cars, and yet people are willing to pay exorbitant prices for its stock. This shows that Tesla’s present earnings do not justify the current market capitalization.

It is extremely dangerous when a company is so highly overvalued, as this means that there is most likely a “bubble” that has been created. In this case, the “bubble” is people’s belief that Tesla’s stock is going to continuously go higher and higher at fast rates, without ever coming down. However, when the stock does inevitably come down, and the “bubble” bursts, it could drop extremely quickly, causing many people to lose large sums of money.

On the other hand, some analysts argue that Tesla is being valued correctly. This is because they are arguing that Tesla is being measured and valued against the wrong industry. They point out that Tesla is not purely an automotive company, but a technology company, due to the multiple research and technology companies that Tesla owns and the fact that they not only produce cars, but batteries, solar banks, and other technology. If properly measured against tech competitors, they claim, Tesla is being valued quite fairly in terms of its price to sales ratio, compared to other tech giants such as Zoom, NVIDIA, and Apple. 

However, I would counter that Tesla’s primary output and product is cars, and many of the companies that it owns are also automotive companies, meaning that it should be measured against them, not against other tech companies. Not to mention, that when comparing Tesla’s PE ratio to those of other companies, such as Zoom, NVIDIA, and Apple (respectively 482.6, 60.14, and 39.00), it is still considerably higher. Therefore, Tesla’s stock is overvalued.