Tesla (NASDAQ: TSLA) stock has more than doubled in the space of seven months. And at $320 per share, the electric vehicle (EV) pioneer’s market cap is back above $1trn.
However, some fear this meteoric rise has been fuelled more by speculative fervour than fundamentals, potentially making Tesla part of another meme-stock craze.
Is this the case? Let’s take a look.
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The Trump trade
Since the US election earlier this month, the Tesla share price has increased 27%. That’s because the market thinks a Donald Trump presidency will benefit Elon Musk’s business in a number of ways.
First, Musk warned back in January that “if there are no trade barriers established, [Chinese EV manufacturers] will pretty much demolish most other companies in the world.”
Trump has promised tariffs on all goods imported into America from China. So that’s potentially good news for Tesla, as Chinese EVs wouldn’t be likely to pose a competitive risk in the US.
Personally, I fear that Tesla’s operations in China may face increasing challenges as a result of Trump’s hardline stance towards Beijing. But that’s another story.
Second, Trump is expected to abolish EV incentives, including the $7,500 consumer tax credit. The market sees this benefitting Tesla’s competitive position, as it may push loss-making EV rivals deeper into the red.
Wedbush analyst Dan Ives said: “A Trump presidency would be an overall negative for the EV industry. However, for Tesla, we see this as a huge positive.”
Finally, some think that Trump’s pledge to deregulate swathes of the US economy might aid Tesla’s autonomous driving project. This may lead to quicker regulatory approvals.
I’m not convinced
Tesla has repeatedly noted how higher interest rates are hurting demand. But the ending of EV subsidies in the US (if that happens) would make Tesla’s cars less affordable, likely reducing demand.
Meanwhile, some of Trump’s policies might even result in higher inflation, hurting demand further.
Also, Tesla’s profitability is boosted by selling surplus regulatory credits to traditional carmakers needing to meet emissions standards. Over the past year, Tesla’s received around $2.5bn in revenue from these credits, and it’s basically pure profit. If the US relaxes its emissions standards, fewer carmakers might need to purchase these credits.
And Tesla has a fast-growing solar energy storage business. But will Trump be supportive of solar energy subsidies? Again, I suspect not.
Extreme valuation
Now, I’m bullish on Tesla’s longer-term growth prospects, especially in humanoid robots and self-driving technology. It has massive competitive advantages in manufacturing EVs at scale.
However, the stock is extremely overvalued.
| Metric | |
|---|---|
| Price-to-earnings (P/E) ratio | 87.8 |
| Price-to-sales (P/S) ratio | 11.5 |
| Price/earnings-to-growth (PEG) ratio (forecast 12-month forward) | 10.4 |
An attractive PEG ratio is typically considered to be around 1 or lower. Tesla’s is above 10!
Foolish takeaway
There has been a renewed memefication of Tesla stock playing into the political momentum, and it makes no sense.
David Wagner, Aptus Capital Advisors
Under Trump, Musk is set to co-lead the newly formed Department of Government Efficiency (dubbed DOGE). I continue to admire Tesla as a business, but not the stock at $320, which I reckon is demonstrating meme-like qualities. As such, I think there are other more attractive growth shares for my money.
