Tesla (NASDAQ:TSLA) shares have been rising in recent weeks after beating expectations for second-quarter delivery. The Elon Musk-run company has seen its shares rise 40.9% in the past 30 days and is now trading at huge valuation multiples. I’m still neutral on Tesla because I realize that robotaxi and robotics could be a game-changer for the company, but the valuation is hard to justify.
A revived Tesla
Tesla’s deliveries fell 4.8% year-on-year (YoY) in Q2, but that was better than the market had expected. Tesla delivered 443,956 vehicles in the three months ended June 30, up 14.8% from the first quarter. The shares have since rallied, with positive figures in the electric vehicle (EV) sector suggesting a rebound in demand.
Tesla shares began rallying in June after shareholders voted to give Musk his $56 billion pay package from 2018 and re-incorporate the company in Texas. The news sent Tesla shares soaring more than 10%, pushing the price above $200 per share.
Is Tesla’s price hike justified?
As an automaker, Tesla is clearly overvalued. Even Elon Musk has asked investors to value Tesla as a robotics or artificial intelligence (AI) company rather than a company focused purely on producing road vehicles, even if they are electric. As a result, some analysts may be wondering why Tesla, already trading at high multiples, has risen so much on the back of these improved EV deliveries. That’s a good point.
The stock currently trades at 96.4x non-GAAP forward earnings, making it the most expensive EV stock compared to multiples and one of the most expensive tech companies. Furthermore, expected earnings growth over the next three to five years is just 11.2%, implying that analysts see very little tangible impact from the Robotaxi business in the medium term.
This in turn leads to a price-to-earnings-growth (PEG) ratio of 8.7x, which is much higher than what would normally be considered attractive (1.0x or lower).
Other metrics reinforce this unattractive valuation. The stock trades at 8.3x TTM sales and 7.9x forward sales, representing an 830% and 813% premium to the sector, respectively. Tesla’s forward price-to-cash-flow ratio of 63.9x also represents a 585% premium to the sector as a whole.
However, Musk did announce two major developments that will take place over the next 18 months. The first is the long-awaited Robotaxi, which will be unveiled on August 8, and the second is sales of his Optimus robots, which could begin in the second half of 2025.
What could these developments mean for Tesla?
Autonomous driving offers Tesla the opportunity to dominate a new and exciting segment. From the outside, Tesla seems to be leading the way when it comes to automation. We’ll learn more on August 8. Even Nvidia (NASDAQ: NVDACEO Jensen Huang agrees, recently noting that Tesla was “way ahead” in self-driving technology.
With the Robotaxi, Tesla could tap into new revenue streams. Not surprisingly, one of them would be ride-hailing. In 2023, 76% of Tesla’s revenue was generated from car sales, with another 8% from servicing. Only 5.8%, or $6 billion, came from its Energy Generation and Storage division. Ride-hailing also promises big margins.
Despite the potential of the Robotaxi, I’ve seen very few analyst forecasts that actually attempt to quantify that potential. Cathie Wood’s ARK is an exception. According to ARK Invest, nearly 90% of Tesla’s profits in 2029 will be attributed to the Robotaxi business. In ARK’s bear case scenario, the autonomous ride-hailing business would generate $603 billion in 2029. In the bull case scenario, that number rises to $951 billion. This led Wood’s investment fund to suggest that the stock would be worth $2,600 in 2029.
It’s worth acknowledging that ARK Invest’s predictions have been dismissed by many as overly ambitious. For one, the global ride-hailing market is expected to be worth $215.7 billion by 2028 (according to Statistics). That’s less than half of what ARK thinks Tesla would generate from ride-hailing in its 2029 bear case. I can only assume Wood’s fund is inferring that self-driving vehicles will drive a massive shift from car ownership to ride-hailing.
There are also questions about how Tesla would be able to mass-produce a fleet of Robotaxis large enough to generate the numbers ARK is predicting. Assuming a production cost of between $150,000 and $200,000 (according to ARK Invest), building a global fleet of Robotaxis would likely cost trillions. Tesla doesn’t have the cash flow required to build a global fleet.
Since the first-quarter results, Musk has also touted Tesla’s potential in robotics, with “limited production” of its Optimus robot set to begin in 2025. According to Musk, robots could turn Tesla into a $25 trillion company. Investing in Tesla for its robotics capabilities, however, could be highly speculative given how little we know.
Is Tesla Stock a Bargain According to Analysts?
On TipRanks, TSLA comes in as a Hold based on 12 Buys, 14 Holds, and eight Sell ratings assigned by analysts over the past three months. The average Tesla price target is $180.92, implying 26.57% downside potential.
The Core of Tesla Stock
Despite Tesla being in a pole position to dominate in the autonomous era, I remain wary of Musk’s overpromises. This makes it very difficult to get behind a stock that currently trades at 96.4x non-GAAP forward earnings. It could be perfectly priced, and if Musk underperforms on August 8, the stock could fall significantly. For that reason, I remain neutral.
Revelation
