Tesla (NASDAQ:TSLA) stock is trading at a 7.2% premium to its average price target. That’s very unusual, especially to those of us more familiar with UK stocks, which tend to trade at considerable discounts.
The average target price for Tesla is currently $235.19, but there’s an increasingly negative narrative around the stock at the moment.
In fact, in October, HSBC hit Tesla with a ‘sell’ rating and a price target of $146, implying a 41% drop.
Michael Tyndall, an analyst at HSBC, highlighted that many of Tesla’s more promising projects will not generate positive cash flow until the end of the decade.
Tyndall also described Elon Musk as a “single-person risk” for the company.
Valuation
Tesla is trading above its average target price, and that tends to suggest the company is overvalued.
This isn’t always the case, as sometimes brokerages are slow to update their positions on stocks.
However, several recent brokerage updates have been downgrades. And valuation metrics tend to support the notion that Tesla is overvalued.
The stock trades at 81.7 times TTM (trailing 12 month) earnings and 96.2 times forward earnings, making it phenomenally expensive.
Even using the price/earnings-to-growth (PEG) ratio, which is an earnings metric adjusted for expected growth over three-five years, Tesla looks expensive.
The company’s forward PEG ratio is 4.5. Normally a ratio of one suggests fair value, and anything above that could be considered overvalued.
A ratio of 4.5 suggests a company is considerably overvalued.
Alternatives
For me, there’s a clear winner in the electric vehicle/plug-in hybrid (EV/PHEV) space and that’s Li Auto (NASDAQ:LI). The company’s flagship Li ONE SUV is a popular choice for Chinese families due to its spacious interior, long range, and affordable price.
The L9 PHEV — with 1,100km of range — has also been well-received and the company is looking to expand its offering to 11 vehicles by 2025.
This is up from four at the moment, targeting the market for vehicles priced at CNY200,000 (£22,225) and higher.
Li Auto also has a strong focus on technology, with features like autonomous driving and a user-friendly infotainment system.
It’s also strong on valuation. The below chart compares Li, Tesla, NIO and Porsche — which is also making exciting movements in the EV space.
| Li | Nio | Porsche | Tesla | |
| P/E TTM | 31 | N.A. | 14.2 | 81.7 |
| P/E Forward | 37.1 | N.A. | 14.5 | 96.2 |
| P/S | 2.53 | 1.78 | 1.84 | 8.37 |
| PEG | 0.04 | N.A. | 4.69 | 4.53 |
| Debt-to-equity | 6.40% | 40.09% | 21.67% | 8.95% |
As we can see from the below, Li Auto actually looks pretty attractive versus its peers. It’s vastly cheaper than Tesla on near-term earnings metrics, but more expensive than Porsche.
However, using the PEG ratio, it looks phenomenally inexpensive. In fact, I’ve come across very few companies that have a PEG that low.
Of course, some of this reflects the risks of doing business in China, and the slowdown of the domestic economy. But the benefits outweigh the risks for me.
And this is why I’ve been buying Li Auto shares, and not Tesla.
