At the time of writing, Tesla (NASDAQ:TSLA) stock is trading for $241.43 and the average share price target is $236.38.
It’s rarely a good sign when the share price exceeds what brokerages and investment institutions think it’s worth.
Some might say that the Tesla share price is horribly expensive. At the moment, it’s certainly not top of my list.
Valuation metrics
Tesla’s valuation metrics are outstandingly expensive. The Elon Musk company trades at 77 times TTM (trailing 12 month) earnings and 89.4 times forward earnings.
While it’s one of only a few electric vehicle (EV) manufacturers to be profitable, it’s very hard to see much justification for the valuation.
We may assume therefore that Tesla’s growth prospects must be excellent. Otherwise investors wouldn’t be willing to pay a premium for the stock.
Well, even using the price/earnings-to-growth (PEG) ratio, which is adjusted for growth over the coming five years, it’s not cheap. The stock has a PEG ratio of 3.9.
Anything above one normally suggests a company is overvalued. As such, Tesla looks particularly expensive.
Of course, it’s worth considering that investors are paying for growth beyond the next five years. By then, Tesla’s autonomous cars and taxis should be contributors to net income.
While I want to believe in the Tesla project, and I hope to see Musk’s visions become a reality, I’m not sure I can put my money behind it.
Alternatives
Tesla has a commanding position in the sector. But it’s by no means the only company making exciting moves in the space.
The table below provides some comparisons between some of the most exciting EV companies and companies with EV offerings.
As we can see, not all of them are profitable. As such, the most useful point of comparison is the price-to-sales ratio.
| Tesla | Rivian | Lucid | Li Auto | Nio | Xpeng | BYD | Porsche | |
| Price-to-sales | 7.8 | 4.4 | 12.1 | 1.8 | 2.6 | 4.4 | 1 | 1.9 |
| Price-to-earnings (forward) | 89.4 | 39 | 21.2 | 14.1 | ||||
| PEG | 3.9 | 0.06 | 0.38 | 2.2 |
My personal favourite is Li Auto. It trades at just 1.8 times sales, and is profitable — the first of the Chinese newcomers to do so.
The PEG ratio is also particularly interesting at 0.06. In fact, it’s among the cheapest companies I’ve come across, regardless of the sector.
Growth will be driven by the L9 SUV and new models. The company plans to expand its line-up to 11 models by 2025, up from four currently, targeting the market for vehicles priced at 200,000 yuan (£22,225) and higher.
Yes, there will be concerns as to whether this Chinese manufacturer will be able to compete internationally due to geopolitical tensions / trade wars.
Nonetheless, it’s a really interesting investment opportunity, and one I’ve recently taken advantage of. I really like the look of L9, and the valuation is exceptional.
