Tesla has plenty of things going for it, but that doesn’t make its “mind-boggling” valuation worth it, Bernstein says.
Analyst Toni Sacconaghi downgraded shares of the electric vehicle pioneer to the equivalent of Sell from Hold on Tuesday. He left his price target unchanged at $900 a share. The stock slipped 0.7% in midday trading Tuesday to $1,528.74, a little worse than the change of the overall market.
“We understand the bull case,” wrote Sacconaghi in a research report. Margins are improving, software revenue sales are impressive, and electric vehicle penetration of the overall auto market is increasing. Still, he is “not yet ready to count on world domination” for Tesla (ticker: TSLA).
Tesla has a market value, including debt, roughly equal to Toyota Motor (TM) and Volkswagen (VOW.Germany) combined. That pair makes about 20 million cars annually. Tesla’s goal, before the pandemic hit, was to deliver about 500,000 in 2020. “Tesla now even looks expensive versus large cap growth tech,” adds the analyst.
It’s a bearish call, but his $900 price target, values the company at about $167 billion. That would be enough to make Tesla the second most valuable car company on the planet.
Sacconaghi isn’t alone in his views. The entire Street struggles with Tesla valuation. Twelve analysts rate shares the equivalent of Sell, while seven rate shares Buy. That’s a rarity on Wall Street. The average buy-rating ratio for stock in the Dow Jones Industrial Average is about 55%. The average Sell-rating ratio—which is the number of sell ratings divided by total ratings—is about 7%.
The average analyst, however, is a little more bullish than Sacconaghi. The average Street price target for Tesla stock is up to about $1,200, up about $400 a share over the past month.
Year to date, Tesla stock is on an incredible run, rising about 270% as of Monday’s close, easily beating comparable returns of the S&P 500, as well as automotive peers.
Where the stock goes from here is anyone’s guess. High valuation is balanced against potential inclusion into the S&P 500—possible after Tesla reported a second-quarter profit—which will create demand for shares from S&P 500 index funds. The company is also hosting a battery technology day in September, which might be another stock catalyst.
“Expectations appear achievable ...and there is strong price momentum in both [Tesla] and among growth stocks more broadly,” adds the analyst. “We do believe valuation matters—at some point.”