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Analysts Can No Longer Justify the Valuation of Tesla Stock

Wayne Duggan

Tesla (NASDAQ:TSLA) stock has gotten a series of major downgrades in recent weeks. Two downgrades last Friday should be particularly worrisome for the owners of Tesla stock.

I Shouldn't Have to Say This, but SpaceX Creates No Value for TSLA Stock

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I suppose the first major Tesla downgrade came back on May 1 from Tesla CEO Elon Musk. That was the day Musk tweeted, “Tesla stock price is too high imo.” I don’t know if that tweet represents a downgrade to a “hold” rating or a “sell” rating. Regardless, TSLA stock was trading at $701 at the time, and now it’s trading at $998.

But in this story I will focus on the downgrades from Morgan Stanley and Goldman Sachs because they came from professional Wall Street analysts.

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The Problem With TSLA Stock

I’ll start off with Tesla’s valuation problem, which is the core of Goldman’s thesis. Tesla is now trading at seven times its sales and 312 times its forward earnings.

Tesla bulls argue that its shares should be valued as a high-growth tech stock and not as an auto stock. But at this point, Tesla is more overvalued than even the poster child of tech growth stocks, Amazon.com (NASDAQ:AMZN). Tesla’s forward earnings multiple is roughly three times higher than Amazon’s, and its price-sales ratio is more than 50% higher than Amazon’s.

For those people crazy enough to still see a company that makes cars as an auto company, the valuations are even more absurd. Tesla’s forward earnings multiple is 4,800% higher than that of Ford (NYSE:F) stock.

Goldman Sachs analyst Mark Delaney seems like a genuine Tesla bull. But at some point, even the most bullish analyst has to be pragmatic and logical.

“We’d look to become more positive on Tesla stock again if we had more confidence in the near to intermediate term trajectory in fundamentals, or if valuation became more attractive,” Delaney says.

It seems like he would be itching to recommend the stock if only its valuation wasn’t laughable. Goldman now has a “hold” rating and a $950 price target on Tesla.

The Risk Facing Tesla

Morgan Stanley analyst Adam Jonas chose to focus more on the potential risks to Tesla’s business and its growth outlook. Jonas said Tesla stock is pricing in too much near-term success, since the world is in the middle of a pandemic.


Auto sales and particularly auto prices will likely take a big hit in 2020. At the same time, auto demand is softening, and Tesla is facing a wave of international competition in China and Europe. Finally, Tesla is facing increasing competition on the autonomous vehicle front from companies with far more resources.

Jonas specifically mentioned Amazon as a potential autonomous-vehicle (AV)  competitor. However, Navigant Research recently named Alphabet (NASDAQ:GOOGL) subsidiary Waymo as the clear market leader in AV technology.

Finally, Jonas said China is one of the brightest growth opportunities for Tesla. But Tesla could also take a much bigger hit than other U.S. stocks if relations between the US and China break down ahead of the November election.

“Among the many risks facing Tesla at this time, we would rank risks related to US-China relations at the very top,” Jonas says.

Morgan Stanley dropped its rating on TSLA stock to “underperform” and cut its price target from $680 to $650.

Tesla Is a Battleground

I wrote back in November that Tesla gets so much love and so much hate because few people are actually treating it like an investment. Somehow Tesla has become a philosophical, political and generational battleground.

When Tesla bulls buy a share of its stock, they see the move as a shot fired for the future and a win for social progress and the environment. When Tesla bears short a share of stock, they see the move as a vote for reality, reason and centuries of proven investing principles.

As I have said repeatedly, this situation is unique in today’s market. Tesla is the most chaotic stock out there today. I don’t want to touch it with a 10-foot pole, and neither does Wall Street.

Following last week’s downgrades, only 27.2% of the analysts who cover the stock have “buy” or “outperform” ratings on it. Given Wall Street’s documented historical bias toward bullishness, that 27% number is startling.

If you are going long or short Tesla at this point, good luck to you. You’re going to need it. I’m staying on the sidelines.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long GOOGL.

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