Unravelling the Tesla Stock Conundrum: A Deep Dive into its Overvaluation
Unravelling the Tesla Stock Conundrum: A Deep Dive into its Overvaluation
In the midst of a remarkable rally in 2023, Tesla's stock has been the talk of the town. However, not everyone is convinced about the electric vehicle (EV) manufacturer's valuation.
With some analysts arguing that the company's true worth is closer to $26 per share, rather than the current $290, does this suggest an overvaluation of more than 1,000%?
The Analyst's Perspective
David Trainer, the CEO of New Constructs, has voiced his concerns about the company's fundamentals, stating that they seem to be "disconnected from reality". Despite Tesla's shares soaring by 113% this year and its market cap briefly exceeding $900 billion, Trainer remains sceptical. Tesla has been riding the wave of the AI-fuelled tech stock boom, and even a lukewarm second-quarter earnings report hasn't significantly dampened investor enthusiasm.
The Earnings Report: Tesla's Q2 Results
Tesla's second-quarter earnings report showed a mixed picture. While the company continues to ride the AI-fuelled tech stock boom, with its shares up a 113% this year and its market cap briefly topping $900 billion, there were some areas of concern. The EV market leader's gross profit margin has shrunk to 18.1% in the April-June period, following several price cuts announced this year, down from 19.3% in the first quarter. This shrinkage in gross profit margin indicates a potential issue with profitability, which is a key factor in stock valuation.
Trainer highlights that Tesla cars are no longer oversubscribed and questions the company's "lacklustre" production figures. He argues that to justify its current stock price, Tesla would need to boost its return on invested capital to levels not achieved by even the most profitable businesses in the world. His calculations suggest that Tesla's worth is just $26 per share – a staggering 90% below its current valuation.
The CEO's Acknowledgement
Musk himself has acknowledged Tesla's production and delivery shortfalls. He stated, "We continue to target 1.8 million vehicle deliveries this year, although we expect that Q3 production will be a little bit down because we've got summer shutdowns for a lot of factory upgrades."
The Bullish Perspective
However, not all analysts share Trainer's views. Dan Ives, the CEO of Wedbush, remains bullish on Tesla's stock. He likens Tesla's position to Apple's in the late 2000s, where its stock price did not yet reflect its earnings potential. "We view Tesla where Apple was in the 2008/2009 period as Cupertino was just starting to monetise its services and golden ecosystem," Ives wrote in a research note.
Conclusion
In conclusion, the debate around Tesla's stock valuation continues to rage on. While some analysts believe the company is grossly overvalued, others remain optimistic about its future potential. As the EV market continues to evolve, only time will tell who has the right perspective.
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