Morgan Stanley’s Tesla share price target is $1,200. Is it a buy?

With the Tesla share price target set at $1,200 by analysts, its market value could one day be $1.2trn. Should I buy it now?

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Tesla (NASDAQ: TSLA) is now the fifth biggest company in the US, but it draws a lot of conflicting views. At the very least, it has helped expand the electric vehicle (EV) market, which I think is a good thing. But is it a good investment? Morgan Stanley just reaffirmed Tesla’s share price target of $1,200. This would mean the EV maker would have a market value of $1.2trn compared to today’s $1.07trn.

Is either valuation justified? I’m going to take a look at the stock to see if it’s a buy for my portfolio.

Can Tesla’s share price rise?

At time of writing, Tesla’s share price is almost $1,186. This doesn’t leave much room to hit Morgan Stanley’s price target of $1,200. Have I missed the opportunity to invest in Tesla?

I think I might have. The share price is already up 68% this year alone. Over one year, the stock has rallied a huge 142%.

I can see why the share price has risen lately. Revenue is forecast to rise 62% this year, and profit before tax (PBT) is set to grow a huge 600%. This is insane growth, but with a market value of over $1trn, it had to be.

What about growth for the next two years? Again, it’s impressive. PBT is set to grow by 66% next year, and a still respectable 12% the year after that.

So can Tesla’s share price rise? On these growth numbers, I can’t see why not. Its already rich valuation doesn’t seem to have mattered before. The share price has continued to rise, and Morgan Stanley has reiterated its target price. Clearly, there isn’t a concern about Tesla’s current valuation.

Tesla: the bear case

I do need to add some balance here though. Some may disagree but I think valuation matters, so this could weigh on any further rise in Tesla’s share price.

On a price-to-earnings basis, the stock is now valued on a multiple of 185 for this year. In my view, this is extremely rich, and growth must carry on in the high double-digits to warrant this multiple. I don’t think a forecast for PBT to grow 12% in two years is high enough.

But my biggest concern over Tesla’s share price is competition. The EV market is a hot sector right now, and this attracts competition. Rivian is a recent example of this. The company listed through an initial public offering this month at what I consider a high valuation. It reminded me of the dotcom bubble that I wrote about here. I think investor enthusiasm for the sector is pushing up stock valuations, and Tesla’s share price is no different.

I also think the more experienced car companies will want to take a slice of the EV market. For example, Ford plans to increase EV production, aiming to be the second-largest US producer of EVs (behind Tesla). As it stands, Ford is only valued at $80bn, so a small fraction of of its EV rival.

Then, just last week I wrote about Apple’s plans to launch a fully autonomous EV. Tesla is going to have growing competition in this industry.

Should I invest?

I think Tesla is a good business, just not a good investment for me at this share price. I believe there are better shares to consider.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. 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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