Stock Market

Even Elon Musk Can’t Justify Tesla Stock’s Sky-High Valuation

Investors and analysts often debate whether Tesla (NASDAQ:TSLA) should be viewed as an auto company or a tech company. The reality is that it is both. The company’s innovative electric vehicles and renewable energy products underscore its role in the auto industry, while its cutting-edge technologies, such as self-driving capabilities and AI-driven software initiatives, underscore its position as a tech company. This unique combination of automotive and tech capabilities sets Tesla apart from traditional automakers and positions it for future growth.

But there is a price for everything.

I’m a fan of the company and believe Elon Musk is a visionary (who like all visionaries gets things right and wrong). Many invest in TSLA stock because they believe they are investing in Musk. But a company is not a stock, and a stock is not a person.

When we look at valuation metrics, there is absolutely no doubt that the stock is expensive on multiple metrics. Maybe this doesn’t matter because of growth potential, but it certainly makes Tesla stock very risky.

Tesla Faces Valuation, Competition Risks

When valuations are high, the clock is ticking, and disappointment risk rises.

That disappointment could come from China, which is the world’s largest EV market. The Chinese EV market is experiencing rapid growth, with Tesla commanding a significant market share. However, the company faces stiff competition from local EV makers and regulatory hurdles. Tesla’s success in China is contingent on its ability to navigate the complicated regulatory environment and outmaneuver its local competitors. Furthermore, the potential ongoing slowdown in the Chinese economy and geopolitical tensions could adversely affect its prospects in the country.

China is a source of disappointment for sure, but perhaps this is offset by Tesla’s cutting-edge technology. The company’s in-house supercomputer Dojo is a prime example of this. Dojo is designed to train AI systems to perform complex tasks, such as enhancing Tesla’s driver-assistance system and advancing its full self-driving (FSD) efforts.

Beyond its core business, Tesla’s technology could also have significant implications for other companies in Elon Musk’s portfolio, creating what some analysts refer to as the “Muskonomy.” Tesla’s Dojo supercomputer could potentially be used as a cloud software as a service platform for other companies, opening new revenue streams for Tesla. The Dojo effect could extend to companies such as SpaceX, Neuralink, and the Boring Company, potentially enhancing their capabilities and creating synergies within the Musk ecosystem.

The Bottom Line on TSLA Stock

While Tesla’s growth has been strong, its valuation is the real question mark. It’s also why I think investors should avoid TSLA stock now – despite what Musk is building.

The company trades at a significant premium to other automakers, reflecting its growth prospects. However, maintaining this premium valuation will require Tesla to continue growing its earnings and reducing its unit production costs. Dojo may help it achieve this. But this remains to be seen, as a lot of good news has been priced into the stock.

The bottom line here is that while Tesla remains a controversial stock, its valuation is clear-cut. Investors would be wise to consider this now.

On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this material is not intended to be used as a primary basis for investment decisions and should also not be construed as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and positioning of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim all liability in respect to actions taken based on any or all of the information on this writing.

Michael A. Gayed is the Publisher of The Lead-Lag Report, and Portfolio Manager at Tidal Financial Group, an investment management company specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers.

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