Tesla Stock: Hugely Expensive After Second Quarter Earnings Gain


Shares of Tesla (TSLA) are starting to get really warm again, up more than 30% in July. The rebound was fueled by Tesla’s impressive second-quarter blow and the relief experienced by the broader tech sector. While the profit increase of 57% was impressive, the valuation remains incredibly high. Furthermore, investors may underestimate the potential for a steep decline as the global economy leans into recession.

Not to take away the incredible efforts of Elon Musk and his company, selling 12.1 times over is simply too high a price for an automaker that will face a wave of hungry rivals over the next decade.

Recent comments from the Federal Reserve following a new rate hike of 75 bps have been reassuring for investors holding stocks with high multiple growth potential. While the meeting could spark a rally of relief in the most defeated names, Tesla’s long-term roadmap could be very bumpy.

Few companies, especially car manufacturers, are immune to the effects of an economic contraction.

Tesla stock clocks with another impressive result

Tesla makes a habit of beating profits. The latest blow was driven by higher average sales prices and strong vehicle deliveries. Demand for Tesla’s hotline of EVs doesn’t seem to indicate a recession is on the way. Whether Tesla’s quarterly strength bodes well for the affluent consumer (who is less distressed by inflation) remains to be seen.

In any case, Tesla appears to have freight train momentum as we enter a period of economic sluggishness. Whether Tesla’s sales momentum can carry it through this recession is the million-dollar question.

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Tesla continues to be the king of EVs, putting it on the right side of a powerful secular electrification trend that could last for many years to come. After such a quarterly strength, it certainly looks like the secular tailwind is stronger than the economic headwind.

A strong brand, an impressive line-up of vehicles and high-end technologies have been differentiators that have acted as a kind of moat around the company’s share of economic profit in the red-hot EV market.

Revenues and margins appear to be on the rise. As Tesla’s Superchargers continue to roll out across the country (and then the world), an increasing number of consumers will be willing to go electric on their next vehicle purchase.

Tesla Stock: Worth the premium price tag?

Despite the powerful secular trends, I don’t consider Tesla’s moat impenetrable. Tesla may be the EV leader today, but it’s uncertain whether Elon Musk’s empire can keep the throne in 10 years. As traditional automakers go electric and become more tech-like, Tesla stock could face significant valuation and multiple contraction.

Alternatively, the exciting automakers – think Ford (F) – could be rewarded with significant multiple expansion. I would say the first case is more likely. The argument for Tesla’s premium multiple was that the company is a technology company that makes cars rather than a car company with cool technology.

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Sure, Tesla has intriguing technologies running behind the hood, but are such features and functionality reproducible by other automakers beckoning in top tech talent? Probably. The playing field is tied even by the decade, and I would argue that Tesla may not be able to extend its edge over its competitors.

Tech Titan Apple (AAPLThe rumor has been going around in the auto business for quite some time now. Currently, the rumor mill points to a fully electric and autonomous vehicle that could be launched in the second half of this decade.

As one of the most innovative tech companies in the world, a move into the auto industry could weigh heavily on Tesla’s economic moat. Apple has the brand and technology to outperform almost any rival it chooses to fight for market share.

All it took was a simple change to the iOS operating system to wreak havoc on social media companies. Apple’s ad business is relatively small today, but the move could lay the groundwork for a bigger boost in the future, perhaps once the metaverse goes mainstream.

Apple’s entry into the auto industry poses a major threat to Tesla, and I don’t think it’s reflected in current valuations. Sure, Apple is many years away from launching a car, but when it does, Tesla’s best days could be in the rearview mirror.

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Wall Street’s View of Tesla

As for Wall Street, Tesla has an average buying consensus rating based on 18 purchases, 6 held and 7 sales allocated in the past three months. Tesla’s average price target of $872.28 implies modest upside potential of 3.5%. Analysts’ price targets range from a low of $73.00 per share to a high of $1,580 per share. (See TSLA Inventory Forecast at TipRanks)

Takeaway: the valuation is too high relative to the risks

Tesla does almost everything right these days. Now that we’re in a recession, it can be harder to blow the results away. Furthermore, competitive threats will increase significantly over the next six years. Auto rivals and tech companies could be breathing down Tesla’s neck. That doesn’t bode well for the rich diversity.

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Disclaimer: The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates, and is to be considered for informational purposes only. At the time of publication, the author had no position in any of the securities mentioned in this article.


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