Unpopular opinion alert! I think Tesla shares are overvalued at $1,000

Jonathan Smith explains why he thinks Tesla shares are overvalued, the same week that the market capitalisation passes the golden $1trn mark.

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Tesla (NASDAQ:TSLA) shares hit all-time highs yesterday at $1,085 after breaking above the $1,000 at the start of the week. This key milestone also pushed the market capitalisation above the $1trn mark. Doing so it becomes the first carmarker to hit this peak, and joins a club of stocks valued above $1trn that I can count on my two hands! Given such a lofty value, I won’t be looking to buy any shares. Let me explain.

Reasons for the recent jump

The jump in Tesla shares this week was largely to do with an announcement by Hertz. News broke that the car rental company had ordered 100,000 cars from Tesla, due for delivery by the end of this year. This is a huge order for both sides. For Hertz, this represents around 20% of the size of the current fleet. For Tesla, it produced just over 237,000 cars in Q3. So this order makes up a large chunk of total production for an entire three months.

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The positive boost for the share price was justified on this news. I think this is a great deal for both sides and does increase the value of Tesla stock due to the revenue generated. 

Another reason for the continued rally in Tesla is down to the most recent Q3 results. These came out last week and showed good growth. More specifically, production was up 67% year-on-year. Automotive revenue was up 58% over the same period, helping to deliver over $2bn in net income for the quarter.

Why I think Tesla shares are overvalued

I recognise that Tesla is doing a great job now it has reached scale and is generating profitable quarters. Yet I think that the current value assigned to Tesla shares is too optimistic.

For example, let’s take a look at the price-to-earnings ratio. This is the most common tool I look at to see a value of a stock. For Tesla, the ratio is at 332. In comparison, I usually look at a stock with a ratio of 10 and use this figure as a general barometer of where a fairly valued company should be. 

So just to clarify, Tesla shares are currently trading at 332 times earnings. That’s an incredibly large premium attached. I agree the company has a bright future and does command a premium when buying shares, but not this much.

NIO is the most similar EV company on the market. With a market capitalisation of $67bn, it’s still loss-making so has a P/E ratio of 0. Another company I can look at is Toyota. It has a market cap of $280bn, and a P/E ratio of 9.

So I just struggle to want to buy shares in a company that dwarfs the value of other car companies, despite not having the car production or net income to justify the premium.

Clearly, my opinion is unpopular in the market. Tesla shares have only been heading higher recently. I could be wrong going forward, with momentum and positive results pushing the shares even higher. I won’t be investing any time soon.

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jonathansmith1 has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended NIO Inc. and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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