I still can’t wrap my head around Tesla Stock’s (TSLA) valuation

On January 21, 2025By Littum

Tesla ( TSLA ) stock jumped again on Wednesday, leading the market higher after some positive inflation data. However, this only served to make the electric car maker more expensive, with the stock now trading at 160x forward earnings. Despite being broadly supportive of Elon Musk’s business endeavors, I’m bearish on Tesla simply because the valuation is incredibly hard to justify and Musk’s plans hard to quantify.

I’m bearish on Tesla, but not because it lacks ambition. Instead, I would argue that Tesla’s goals, which go far beyond electric vehicles with autonomous driving and robotics at the forefront, are very ambitious.

For starters, the company’s progress in these areas has been slower than originally promised. While Tesla continues to tout its Full Self-Driving (FSD) capabilities, it remains at Level 2 autonomy, lagging behind competitors like Waymo and Cruise in achieving true autonomous driving.

Meanwhile, the company’s plans for Optimus robots and Tesla trucks on Mars seem even more far-fetched to some onlookers, bordering on science fiction rather than near reality. Some analysts have also suggested that the disconnect between Elon Musk’s bold promises and actual delivery timelines has become a recurring theme, potentially eroding confidence in the company’s ability to achieve its very ambitious goals. In addition, Tesla’s short-term plans face increasing competition and regulatory scrutiny.

The company’s autonomous driving technology has also faced criticism for its safety record and misleading marketing, while its robotics division remains largely conceptual despite a promise of a 2025 rollout. And as traditional automakers and tech giants pour resources into electric vehicles and self-driving technology, Tesla’s first -mover advantage may be being eroded.

With this in mind, the company’s ability to maintain its technological edge – particularly the strength of its computing power – while scaling production and entering new markets is particularly important in determining whether it can deliver on its ambitious plans and justify its high valuation.

Second, my bearishness is further compounded by the difficulty of trying to quantify Tesla’s goals, which can be an exercise in futility given the company’s penchant for veering into uncharted territory. ARK Invest’s ambitious $2,600 stock price target for 2029 exemplifies the wide range of forecasts, with projections varying wildly among analysts.

These estimates often rely on speculative assumptions about Tesla’s future ventures, including robotics and AI, which have yet to materialize as viable revenue streams. Moreover, the idea of quantifying potential earnings from Mars operations borders on the absurd, highlighting the inherent challenge in valuing a company with such nebulous long-term ambitions.

And I’m not the only one struggling to quantify Tesla’s goals. In fact, the most bearish analyst, Gordon Johnson of GLJ Research, who maintains a sell rating with an extremely low price target of $24.9, assigns no value to Tesla’s long-term goals.

But the main reason I’m bearish is Tesla’s valuation metrics, which contrast with both industry norms and its own historical averages. This raises serious questions about the stock’s current price and its sustainability.

With a forward price-to-earnings (P/E) ratio of 160x on a non-GAAP basis, Tesla trades at a staggering 843.5% premium to the sector median. This disconnect from fundamentals is further underscored by its forward price-to-earnings-to-growth ratio of 17.5x, which is 971.8% higher than the sector median and 378.3% above Tesla’s own 5-year average.

Even looking ahead, Tesla’s estimated P/E ratio is elevated, with 2027’s projected P/E of 84.2x still significantly above industry norms. These metrics suggest that Tesla’s current valuation is based on extraordinary future growth and success in unproven markets rather than its current financial performance. Such a valuation leaves little room for error and poses significant downside risk if the company fails to live up to these high expectations. As a result, the execution risk is huge.

On TipRanks, TSLA comes in as a team based on 13 buy, 12 hold and nine sell ratings assigned by analysts in the past three months. The average TSLA stock price target is $329.63, implying about 20.3% downside risk.

See more TSLA analyst ratings

I’m bearish on Tesla because its valuation is divorced from fundamentals and heavily dependent on unproven future ventures. While the company is a leader in the EV market and boasts ambitious plans in autonomous driving and robotics, execution has typically lagged behind promise, and competition continues to intensify. As much as I want to support this Musk venture, I simply cannot.

The speculative nature of its long-term goals makes it nearly impossible to quantify its potential, leaving investors to rely on lofty projections that may not materialize. With a forward P/E of 160x and analysts predicting downside potential, Tesla’s current price reflects enormous risk and suggests that an investment would be highly speculative. For these reasons, caution is warranted when considering the stock at its current valuation.

Disclosure