The Tesla (NASDAQ:TSLA) share price has turned red hot in the second half of 2024. Buoyed by the promise of autonomous vehicles and Donald Trump’s upcoming presidency, retail investors have gone crazy for Elon Musk’s $1.5trn company.
However, the company which most people know for its electric vehicles (EVs) now trades at 186 times forward earnings. And the price-to-earnings-to-growth (PEG) ratio, which takes growth estimates into account, stands at 22 times. For those of you who are new to the PEG metric, a ratio above one is typically considered overvalued.
So, is this vast valuation really justifiable?
What analysts say?
Since the US election on 5 November, 2024, Tesla’s stock has surged 70%, reaching new all-time highs. This growth is attributed to anticipated policy support from the Trump administration, particularly in areas like autonomous driving and artificial intelligence. So, here’s what analysts have said since the election.
- Wedbush raised its price target from $400 to $515, with a bullish scenario of $650 for 2025, citing deregulation benefits.
- Mizuho upgraded Tesla from Neutral to Outperform, setting a $515 price target based on optimism for growth under new policies.
- Morgan Stanley increased its target to $400, citing enthusiasm for AI and autonomous technology.
- Truist maintained a Hold rating with a target of $360, expressing an “incrementally cautious” stance after Tesla’s recent rally.
- Barclays maintained a Hold rating with a target of $260, reflecting concerns about valuation.
- Goldman Sachs’ Mark Delaney raised the price target from $250 to $345, though this still implies a huge discount based on current prices.
- GLJ Research’s Gordon Johnson — one of the most controversial analysts covering the stock — assigned a Sell rating with a price target of $24.86, citing overvaluation concerns.
Meanwhile other analysts warned that Tesla’s rapid rise may prompt short-term profit-taking. At nearly $500 a share, and with a valuation in the stars, you can see why this may occur.
However, despite there being several target price upgrades over the past two months, the average share price target is $287. That’s 40% less than the share price at the time of writing.
Is the price justified?
Bullish analysts claim that Tesla’s lofty valuation is justified by its potential in autonomous driving, AI, and energy storage. Wedbush and Morgan Stanley highlight Tesla’s transformational role in these markets, projecting substantial revenue growth from self-driving technology, software services, and renewable energy. In fact, Tesla’s biggest fan, Cathie Wood, suggests self-driving vehicles could generate almost $1trn a year in sales by the end of the decade. Other bulls argue that Tesla’s first-mover advantage in EV infrastructure, AI, and battery tech supports the premium.
However, as highlighted by the likes of Goldman Sachs and Barclays, the valuation relies on ambitious growth assumptions. Slower execution, margin pressures, or regulatory hurdles could challenge Tesla’s ability to meet these high expectations. And this largely reflects my personal concerns. While I love my Tesla car, I don’t love Tesla stock at this price.
