Tesla (TSLA) remains one of the most important and influential stocks in the market. Whether you categorize TSLA as a so-called “Magnificent Seven” stock or not, its market capitalization of more than $1 trillion means that wherever it trends, so go many passive investors' portfolios.
Tesla's evolution to the leading U.S. electric vehicle (EV) maker initially had many investors excited. It's also true that Tesla has built an incredible company on this front alone.
But much of the stock's recent rise can be tied to the firm's latest ambitions around autonomous driving, robotics and artificial intelligence (AI). Additionally, with new lower-priced models reportedly on the horizon, investors have a plethora of potential catalysts to look to as reasons to buy and hold Tesla stock, even at a valuation that many investors may be starting to question.
In fact, a number of top experts have begun to do exactly just that. Let's dive into two recent downgrades for Tesla stock and why analysts may be souring on the firm's pathway forward.
Analysts Downgrade Tesla Stock
Analysts from Baird and Argus Research each recently downgraded TSLA stock, citing a number of concerns that they believe investors should be pricing in. Baird put a $320 price target on Tesla, which suggests that the stock (trading above that price target currently) could be a stagnant holding at best over the course of the next year.
Baird analysts Ben Kallo and Davis Sunderland noted that Tesla investors' enthusiasm over what's expected to be a high-profile robotaxi launch, as well as a future including a lower-priced EV model, may be exaggerated. Specifically, these analysts project that only around 6,000 robotaxis are likely to hit the roads by the end of next year. That's a far cry from CEO Elon Musk's previous claims.
Echoing this sentiment, Argus Research analyst Bill Selesky also downgraded Tesla stock to a “Hold” rating, suggesting that non-fundamental factors have been unsustainably taking TSLA stock higher. With the macro environment being what it is, and added risk around Tesla stock tied to Musk's relationship with President Donald Trump, there are plenty of reasons aside from the removal of EV tax credits why TSLA may be on shaky footing.
What Do the Fundamentals Say?
Factoring in the qualitative factors these analysts are talking about into any financial model of a company like Tesla is difficult. That said, there are a number of key fundamental metrics we can look at to determine whether Tesla may be overvalued on the basis of its core business alone.
In terms of Tesla's overall valuation multiples relative to other automakers — which tend to trade around the single-digit or low double-digit price-earnings (P/E) levels — Tesla stock is certainly expensive. At a P/E ratio of 234 times, a price-sales ratio (P/S) of more than 10 times, and a price-book (P/B) value of nearly 14 times, Tesla is one heck of a pricy automaker when grouped with its larger global peers (in terms of overall sales volume).
These multiples reflect some serious margin improvement due to non-EV related business lines picking up over the course of the coming years. And whether that's autonomous robotaxis, robots, Tesla's energy business, or a host of other potential catalysts that Musk will inevitably put forward, this multiple clearly isn't being assigned due to Tesla's core auto business.
What's the Consensus on Wall Street for Tesla?
Overall, Wall Street analysts appear to be trending in the same direction as Argus and Baird. With a mean price target roughly 9% below where TSLA stock currently trades, experts may believe shares could have more downside from here.
Indeed, the disparity between Tesla price targets, from a high of $500 to a low of $115, suggests that there's not a strong consensus on where TSLA is headed from here. At a trillion-dollar valuation, a surge to the $500 level would imply Tesla breaking back into the top 10 companies by market capitalization. But given the direction of other “Magnificent Seven” stocks, it's hard to envision Tesla once again nearing the top of the market cap leaderboard.
I tend to agree with the majority of analysts on Tesla stock at this point in time, and do think the various non-fundamental headwinds facing the company are real. We'll have to see where Tesla trends from here. But for now, I'll happily steer clear and watch from the sidelines.
