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Tesla : Overheated Stock

(Tue, 14 July 2020). Tesla`s record surge is not backed by fundamentals. There are at least two reasons why the stock could top out very soon.

Tesla is being fueled by a FOMO rally from Robinhood traders, according to Bloomberg data. More than 457,000 individual traders now hold TSLA stock. Analysts warn that the company’s current valuation is high relative to its earnings and book value. Tesla’s (NASDAQ:TSLA) stock continues surging to new record highs, but two key factors suggest the rally is overheated.

Tens of thousands of day traders on Robinhood are fueling a “Fear Of Missing Out” (FOMO) rally around Tesla. It might leave the stock vulnerable to a potential correction when the positive sentiment subsides. The Tesla stock is also pricing in 166 times the predicted earnings in 2021, according to market analyst Holger Zschaepitz. Compared to traditional car makers like Toyota, Tesla has a much higher valuation relative to earnings.

 

Robinhood Traders Are Fueling A Massive FOMO Rally

On July 13, 40,000 Robinhood traders bought TSLA in a single hour, Bloomberg reports. Tesla’s share price surged 16% as a result before reversing gains later in the day. Tesla’s extreme volatility on Monday gives us a glimpse into its near-term trend. When an asset is overly bought or shorted, it raises the likelihood of an institutional selloff or a short squeeze. It causes the market to sway to one side, incentivizing investors to take advantage of heightened liquidity.

Tesla is already owned by 457,000 Robinhood users. By comparison, 358,000 Robinhood users own shares of Amazon. The handling of the pandemic and the future of the U.S. economy remain in doubt. In a highly uncertain period, some analysts warn that such a high-profile FOMO rally could result in a correction.

 

Tesla Is Valued Much Higher Than Its Competitors

Holger Zschaepitz, an analyst at Welt, reported that Tesla’s stock is pricing 20 times the book value of the company. By comparison, Toyota’s stock reflects 91% of the Japanese manufacturer’s book value. Just to put things into perspective: Tesla is priced at 6,348 times 2019 earnings. Stock is priced at 166 times 2021 earnings, 20 times book value, & 7 times sales. Toyota, the biggest auto company by market value after Tesla, sells for 61% of sales & 91% of book value.

A common argument from the bulls to support the high market valuation is that Tesla is a tech company, not a conventional car manufacturer. Eli Burton, the founder of a local Tesla community, pointed out in February 2020 that the company produces software, battery tech, and autopilot chips.

For now, the market seemingly perceives Tesla as more than a car maker. Whether the explosive trend of the company’s stock can continue remains unclear. Analysts are divided on the justification of the firm’s high valuation relative to its earnings and book value.

 

 

 

 

 

 


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