Is Tesla (NASDAQ:TSLA) stock undervalued? Well, it’s hard to argue that any company trading at 100 times forward earnings is undervalued. In fact, most of the charts would reinforce that. The stock is exceedingly expensive.
Here’s what the charts say
Starting with the price-to-sales (P/S) ratio, we can see that Tesla has been more expensive, and it’s also been cheaper over the past five years. As the data highlights, Tesla is currently trading around 33% above its lowest P/S ratio during the period. However, the discount versus 2021 levels is huge.
The price-to-earnings (P/E) ratio shows a similar picture. Firstly, we can see that at 124 times trailing earnings, it’s incredibly expensive for a car stock. However, it has been substantially more expensive than it is today.
What’s more, the expected earnings growth rate from here does little to satisfy this valuation. Analysts expect earnings to grow by around 11.5% annually over the medium term. That’s slower than typically ‘boring’ British companies like Lloyds. The result is a P/E-to-growth (PEG) ratio of eight. For context, fair value is considered to be one and under.
All of this suggests Tesla stock should collapse.
A multi-trillion dollar promise
So, why is Tesla so expensive? Well, Elon Musk has repeatedly asserted that Tesla could become the most valuable company in the world, even surpassing the combined market capitalisation of today’s five largest firms. Together, these companies are worth around $11trn. Musk’s vision hinges on transformative technologies beyond electric vehicles and into autonomous robotaxis and humanoid robots.
Tesla’s future is centred on full self-driving vehicles and the creation of a massive robotaxi fleet. This ride-hailing network could operate around the clock, generating continuous revenue and potentially disrupting both the automotive and transportation sectors. Analysts such as ARK Investment Management’s Cathie Wood estimate the robotaxi opportunity alone could be worth up to $14trn by 2027.
In addition, those robotaxis could, in theory, sell their unused computing power to the wider market when not in operation. After all, these vehicles will require some of the most advanced computing technology around. “So if you can imagine the future, perhaps where there’s a fleet of 100m Teslas, and on average, they’ve got like maybe a kilowatt of inference compute. That’s 100 gigawatts of inference compute distributed all around the world”, Musk said in 2024.
Musk is also betting on Tesla Optimus, a humanoid robot he claims could eventually outpace the car business in value. He envisions millions of these robots produced annually, serving in factories and homes, and forecasts that Optimus could generate over $10trn in revenue as adoption scales. These robots would also play an important role in his plan to colonise Mars.
However, coming back down to earth with a bang, there are huge execution risks. Tesla is behind some of its robotaxi peers and Optimus has yet to truly capture the imagination of the investor. I want to see Tesla continue to push technological boundaries, but I can’t put my money behind it yet.
