You’re here (NASDAQ: TSLA) action has won in recent weeks after beating delivery expectations in the second quarter. The company led by Elon Musk has seen its shares increase by 40.9% over the last 30 days and now trades at huge valuation multiples. I remain neutral on Tesla as I recognize that Robotaxi and robotics could be a game changer for the company, but the valuation is hard to justify.
A Tesla in full renaissance
In the second quarter, Tesla deliveries down 4.8% year-on-year (YoY)But it’s better than the market expected. In the three months to June 30, Tesla delivered 443,956 vehicles, a 14.8% increase from the first quarter. The stock has surged since then, with positive numbers across the electric vehicle (EV) sector suggesting rising demand.
Tesla shares had already started to climb in June after shareholders voted to accept Musk’s $56 billion compensation in 2018 and to bring the company back to Texas. That news sent Tesla shares soaring more than 10%, pushing them above $200 a share.
Is Tesla’s rise justified?
As a carmaker, Tesla is clearly overvalued. Elon Musk himself has urged investors to value Tesla as a robotics or artificial intelligence (AI) company rather than as a company that focuses solely on producing road vehicles – even if they are electric. So some analysts may wonder why Tesla, already trading at high multiples, has surged on these improved EV deliveries. That’s a fair point.
The stock currently trades at 96.4 times forward non-GAAP earnings, making it the most expensive EV stock by many multiples and one of the most expensive tech companies. Additionally, the expected earnings growth rate for the next three to five years is just 11.2%, suggesting that analysts see very little tangible impact from the Robotaxi business in the medium term.
This leads to a price-to-earnings-to-growth (PEG) ratio of 8.7x, which is well above what is normally considered attractive (1.0x or less).
Other metrics compound this unattractive valuation. The stock trades at 8.3x TTM sales and 7.9x forward sales, representing a premium of 830% and 813% to the sector, respectively. Tesla’s forward price-to-cash flow ratio of 63.9x also represents a premium of 585% to the sector as a whole.
Musk did, however, highlight two major developments that are expected to take place in the next 18 months. The first is the highly anticipated Robotaxi, which is expected to be unveiled on August 8, and the second is the commercialization of its Optimus robots, which could begin in the second half of 2025.
What could these developments mean for Tesla?
Self-driving presents Tesla with an opportunity to dominate an exciting new segment. From the outside, Tesla appears to have a head start on automation. We’ll find out more on August 8. Even Nvidia (NASDAQ: NVDA) CEO Jensen Huang agrees, noting recently that Tesla is “way ahead” in self-driving technology.
The Robotaxi will allow Tesla to open up new revenue streams. Unsurprisingly, one of them will be the ride-hailing service. In 2023, 76% of Tesla’s revenue was generated by car sales, and another 8% by maintenance. Only 5.8%, or $6 billion, was generated by its Energy Generation and Storage division. The ride-hailing service also promises wide margins.
Despite the potential of Robotaxi, I’ve seen very few analyst forecasts that actually try to quantify that potential. Cathie Wood’s ARK is an exception. According to ARK Invest, nearly 90% of Tesla’s profits will be attributed to the Robotaxi business in 2029. In ARK’s downside scenario, the autonomous ride-hailing business would generate $603 billion in 2029. In its upside scenario, that number rises to $951 billion. Wood’s investment fund has therefore suggested that the stock would be worth $2,600 in 2029.
It should be acknowledged that ARK Invest’s forecast has been dismissed by many as overly ambitious. On the one hand, the global ride-hailing market is expected to reach $215.7 billion by 2028 (according to Statesman). That’s less than half of what ARK thinks Tesla would generate from ride-hailing in its 2029 bear case. I can only assume that Wood’s fund is inferring that autonomous vehicles will drive a huge shift from car ownership to ride-hailing.
There are also question marks over how Tesla could mass produce a fleet of Robotaxis large enough to generate the numbers ARK projects. Assuming a production cost of $150,000 to $200,000 (according to ARK Invest), building a global fleet of Robotaxis would likely cost trillions. Tesla does not have the cash flow to build a global fleet.
Since the first quarter results, Elon Musk has also been touting Tesla’s potential in robotics, with “limited production” of its Optimus robot in 2025. He believes robots could make Tesla a $25 trillion company. However, investing in Tesla for its robotics capabilities could be highly speculative, given how little we know about it.
Is Tesla Stock a Buy, According to Analysts?
On TipRanks, TSLA is rated as a “Hold” based on 12 “Buys”, 14 “Holds” and eight “Sells” assigned by analysts over the past three months. Tesla stock average price target is $180.92, which implies a downside potential of 26.57%.
Tesla Stock Review
While Tesla is in a strong position to dominate the autonomous era, I remain wary of Musk’s overpromising. That makes it very hard to back a stock that currently trades at 96.4 times non-GAAP forward earnings. It could be priced perfectly, and if Musk fails to meet his August 8 targets, the stock could pull back significantly. That’s why I remain neutral.
