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The biggest bubble in modern history? 3 reasons why I wouldn’t buy Tesla stock in my ISA

Image source: Tesla

I’m 52 and have been investing for 34 years. As a veteran, I’ve witnessed four major market crashes since 1987, as well as lots of bizarre behaviour from investors. I’ve also learnt many painful lessons along the way. Today, I try to act as a rational and sensible investor. And, like acclaimed US fund manager Peter Lynch, I understand that, “although it’s easy to forget sometimes, a share is not a lottery ticket…it’s part-ownership of a business.” Hence, when I look at Tesla (NASDAQ: TSLA) stock today, I’m horrified, because I see the ‘mother of all bubbles’. Here are three reasons why I would not buy TSLA for my ISA at anywhere near the current price.

1. Each Tesla sale ‘costs’ shareholders $1.32m

At the current stock price of $695, Tesla has a colossal market value of $658.8bn. Yet it sold under 320,000 vehicles in the first nine months of 2020 and will sell under half a million cars this year. Thus, Tesla’s current market capitalisation ‘values’ each car at $1.32m per sale. In contrast, Toyota is expected to sell 9.5m cars in 2020 and has a market cap of $250bn. This values each Toyota sold at just $26.3k. Thus, TSLA shareholders ‘value’ each Tesla sale at 50 times the value ascribed by Toyota’s owners to each Toyota sold. Frankly, that’s an insane over-valuation — and one I cannot find any imaginable metric to support.

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2. TSLA stock has skyrocketed by 760% in a year

In the past 12 months, the value of Tesla stock has gone ‘to the moon’ (as Bitcoin fans often say). TSLA has soared by 760% in 12 months, making it 8.6 times as valuable as it was a year ago. But remember what Peter Lynch said — a share is part-ownership of a business. So, what brilliant results has Tesla revealed to justify it being valued at nearly 10 times as much as in December 2019? The simple reality is that nothing Tesla has done in 2020 can justify a rise of such a magnitude. Yes, Tesla sold a record 139,300 cars in Q3, but this is still a minuscule market share (0.8% of global sales). Also, Tesla sales in China are flat, while European sales have been falling in 2020.

3. Tesla stock is valued at 1,377 times earnings

There are shares in quality FTSE 100 businesses trading at 10 times earnings today. All else being equal, these stocks will take 10 years to ‘earn’ their present market valuations (thanks to an earnings yield of 10% a year). At Tesla, this price-to-earnings ratio is an astronomical 1,377. That equates to an earnings yield of 0.073%. At its present valuation, Tesla would take until the year 3397 to ‘earn’ its present market cap. Even if Tesla’s earnings were to multiply tenfold, it would still take 138 years (until the year 2158) to get there. Bluntly speaking, that will not happen. That’s why I’m convinced that the Tesla stock price is grossly inflated and, therefore, unsuitable for my tax-free Stocks and Shares ISA.

To sum up, a year ago, Tesla stock was a great buy — because it subsequently doubled, doubled and doubled again (and with more gains to spare). Nevertheless, over the course of 2020, the needles at Tesla have barely moved — except for the surging stock price and Elon Musk’s perpetual over-promising. That’s why, at today’s stock price of $695, I think the risk of investing in TSLA is steeply to the downside. That’s why I’ll be avoiding Tesla stock in 2020/21!

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Cliffdarcy 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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