What's behind Tesla stock's (NASDAQ:TSLA) surge, and is it justified?


Tesla (NASDAQ:TSLA) stock has surged in recent weeks as second-quarter deliveries beat expectations. The Elon Musk-run company's shares have seen a 40.9% gain in the last 30 days and are now trading with some pretty big valuation multiples. I'm still neutral on Tesla, as I understand that robotaxi and robotics could be game-changing for the business, but the valuation is hard to justify.

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A resurgent Tesla

Tesla's deliveries in the second quarter fell 4.8% year-on-year (YoY) but were better than market expectations. In the three months to June 30, Tesla delivered 443,956 vehicles, a 14.8% increase compared to the first quarter. The stock has rebounded since then, with positive data in the electric vehicle (EV) sector indicating a surge in demand.

Tesla's stock began to surge in June, when shareholders voted to give Musk a $56 billion pay package in 2018 and reincorporate the company in Texas. Following the news, Tesla's stock jumped more than 10% to above $200 per share.

Is Tesla's lead justified?

As a manufacturer of cars, Tesla's valuation is clearly high. Even Elon Musk has asked investors to value Tesla as a robotics or artificial intelligence (AI) company, not as a company focused solely on producing road vehicles – even if they are electric. Thus, some analysts may question why Tesla, which was already trading at high multiples, has risen on the back of these improved EV deliveries. This is a good thing.

The stock is currently trading at 96.4x non-GAAP forward earnings, making it one of the more expensive EV stocks and the most expensive technology companies by multiple. Furthermore, the expected earnings growth rate for the next three to five years is only 11.2%, meaning analysts see little tangible impact from the robotaxi business in the medium term.

This, in turn, leads to a price-to-earnings-to-growth (PEG) ratio of 8.7x. This is much higher than what is typically considered attractive (1.0x or less).

Other metrics complicate this unattractive valuation even further. 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 entire sector.

However, Musk is touting two major developments that are set to take place in the next 18 months. The first is the long-awaited Robotaxi – which is set to be unveiled on August 8 – and the second is sales of its Optimus robot, which could begin in the second half of 2025.

What could these developments mean for Tesla?

Autonomous driving gives Tesla an opportunity to dominate a new and exciting segment. From the outside looking in, Tesla appears to be ahead of the game when it comes to automation. We'll find out more on August 8. Even Nvidia (NASDAQ:NVDA) CEO Jensen Huang agrees, recently saying that Tesla is “way ahead” in autonomous driving technology.

Robotaxi will help Tesla open up new revenue streams. It is no surprise that one of these will be ride-hailing. In 2023, 76% of Tesla's revenue was generated from car sales, while 8% was generated from servicing. Its energy generation and storage division generated only 5.8%, or $6 billion. Ride-hailing also promises bigger margins.

Despite the potential of robotaxi, I have seen very few analysts' forecasts that actually attempt to quantify this potential. Cathie Wood's ARK is an exception. According to ARK Invest, about 90% of Tesla's revenue in 2029 will come from the robotaxi business. In ARK's bearish scenario, the autonomous ride-hailing business will provide $603 billion in 2029. In its bullish scenario, that figure rises to $951 billion. In turn, this leads Wood's investment fund to suggest that the stock will be worth $2,600 in 2029.

It is important to understand that ARK Invest's forecasts have been dismissed by many as overly ambitious. For one thing, the global ride-hailing market is expected to be worth $215.7 billion by 2028 (as reported). Statista) That's less than half the amount that ARK believes Tesla will earn from ride-hailing in a recession-hit 2029. I can only assume Wood's fund is anticipating that self-driving vehicles will drive a major shift away from car ownership toward ride-hailing.

There are also question marks over how Tesla could produce a fleet of robotaxiis large enough to generate the figures ARK has estimated. Assuming production costs between $150,000 and $200,000 (according to ARK Invest), building a global fleet of robotaxiis would likely cost trillions of dollars. Tesla simply does not have the cash flow needed to build a global fleet.

Since the Q1 results, Musk has also been touting Tesla's potential in robotics, with its Optimus robot going into “limited production” in 2025. According to Musk, robots could make Tesla a $25 trillion company. However, investing in Tesla for its robotics capabilities may be too speculative, given how little we know about it.

Is Tesla stock worth buying, according to analysts?

On TipRanks, TSLA comes in as a Hold based on 12 Buy, 14 Hold, and eight Sell ratings given by analysts over the past three months. The average Tesla stock price target is $180.92, which implies a 26.57% downside potential.

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Final Conclusion on Tesla Stock

Despite Tesla's position to dominate the autonomous era, I remain wary of Musk's over-promises. That makes it very hard to buy a stock that's currently trading at 96.4x non-GAAP forward earnings. It may be priced for perfection, and if Musk underperforms on Aug. 8, the stock price could drop significantly. So I'm staying neutral.

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