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Why I think the 725% jump in the Tesla share price is absurd

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Whether you love Tesla (NASDAQ: TSLA) founder Elon Musk or not, you have to be overawed by the Tesla share price. It has soared by an astonishing 725% in the past 12 months, making fortunes for loyal investors. If I had invested £10,000 one year ago, when the Tesla share price stood at $50, I would have almost £83,000 at today’s $425. 

Tesla has defied the sceptics, who thought its share price was overvalued when it stood at a fraction of today’s value. Jaws dropped in January, when it was noted that Tesla was worth more than both the Ford Motor Company and General Motors combined. At the time, Tesla’s market cap was $93bn. Today it stands at $393bn.

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There are lots of words to describe Tesla’s incredible recent share price performance, but I’ll stick to just the one. Absurd.

The Tesla share price is absurdly high

Don’t get don’t get me wrong, I love what Tesla has done. I’m writing this from Norway, where almost everybody seems to have one, thanks to the generous state subsidies to encourage the shift to electric motoring.

Stylish, clean electric cars, what’s not to like? These are luxury automobiles, but they are getting cheaper. Tesla is cutting prices as it looks to build market share, and to meet its ambitious delivery target of 500,000 motors this year. It has dropped the starting price of its Chinese-made Model 3 saloons by 8% to $36,805, and announced plans to develop a $25,000 vehicle. 

This week’s third-quarter results gave the Tesla share price another lift, as it beat analyst expectations again to deliver a record $8.77bn of revenues, up 39% on last year. 

When one broker asked whether Tesla could deliver between 840,000 and one million cars next year Mr Musk said that was “not far off”. It would be impressive if Tesla did manage that, although analysts currently forecast about 742,000 vehicles.

Tesla isn’t just a carmaker

Given its rapid growth, why do I think the Tesla share price is absurd? Because Ford sold 5.4m units in total last year, but has a market cap of just $32bn, a fraction of Tesla’s $393bn. General Motorcycles sold 7.7m, yet its market cap is just $54bn. Tesla trades at more than 1,000 times earnings. It certainly isn’t cheap.

Anybody buying in to the Tesla share price at today’s dizzying level is assuming that it is virtually going to take over the global car industry. Yet electric cars still make up just 3% of total sales. It has a long journey ahead of it.

Here’s another worry. Tesla has now delivered five consecutive quarterly profits, but wouldn’t have done so without selling carbon credits to rival car makers. No one knows how long this income stream will last.

On the other hand, Mr Musk has worked miracles before. Also, Tesla also has a booming battery storage and sustainable power generation business, which could match its car business one day.

A lot of short sellers have gone broke betting against the Tesla share price. Personally, I wouldn’t buy at today’s dizzying level, that would be absurd.

I might buy if it fell though.

Right now, I'd consider this.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended 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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