Tesla’s 425% surge on the stock market ignores fundamentals more than any other equity rally in history

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Tesla's 425% surge on the stock market ignores fundamentals more than any other equity rally in history




Elon Musk at the 'made in China' Tesla Model 3 unveiling in Shanghai on January 7, 2020. STR / AFP via Getty Images


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Elon Musk at the ‘made in China’ Tesla Model 3 unveiling in Shanghai on January 7, 2020. STR / AFP via Getty Images

  • The 425% rally by Tesla on the stock market since the beginning of the year, it places the stock on such high levels as to be unsustainable, said the analyst of Needham Rajvindra Gill on Monday
  • “We’ve never seen a stock appreciate so quickly and take so little account of past fundamentals,” Gill added
  • Wall Street estimates for the company’s revenue and earnings have not kept pace with the stock’s soaring rise this year, the analyst wrote.
  • Even if Tesla were to manage to increase sales to a compound annual growth rate of 21% and significantly reduce costs over the course of this decade, in Needham’s baseline scenario, the stock would drop 14% by 2029.
  • To consult the Tesla quote in real time click here.

The rally scored by Tesla since the beginning of 2020 it has contrasted with expectations, with market precedents and even with the performance of the same company in the past, said Needham.

Shares of the automaker have appreciated roughly 425% since the start of the year, while the S&P 500 index has risen only 9% over the same period. While part of the upside was due to better-than-expected quarterly results and analyst upgrades, soaring interest from retail investors and more positive analysts in the stock has mostly silenced cynics since March, when the stock price was at low levels.

Although judging a title based on its evaluation may be “out of fashion”, second needham it must be done to distinguish the ‘hype’ (the inflated expectation) the actual value of the shares.

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“Based on our experiences, we don’t have never seen a stock appreciate so much so quickly and taking so little account of fundamentals of the past, ”analyst Rajvindra Gill wrote in a note before reiterating his rating underperform for the company’s shares.

First of all, the consensus estimates have not kept pace with the sharp rise in the share price. The stock even gained 490% from its March lows to current levels. During the same period Wall Street estimates for 2021 revenue rose only 12%, while those relating to adjusted earnings jumped 25%. The 2022 revenue and profit estimates were increased by 2% and 42% respectively. The rally has “created a further disconnect” between the stock price and fundamentals from what arose last year, Gill wrote.

Even from the perspective of investors with a longer time horizon, Tesla’s current valuation leaves limited upside combined with a potential downside significant, added the analyst. Needham’s baseline scenario sees the automaker’s revenue increase at a compound annual growth rate of 21% over the current decade. the increase in cash flow in this case would be 35% and Tesla would sell 4 million cars a year at an average price of around $ 41,000 by 2029, cementing its position as the world’s largest automobile manufacturer.

However, this base-case scenario expects a 14% decline in the share price taking into account available cash flow over the next 10 years, Gill explained. Even more scenery bearish, with an annual growth in turnover of 17%, “it would not be an easy undertaking”.

Needham ha anche The most positive analysts on Tesla have been denied, according to which the evaluation of Elon Musk’s company should stem from its classification as a technological giant rather than a traditional car manufacturer. Tech stocks trade at high multiples of earnings per share, ranging between 35 and 45 times. Although Tesla has achieved steady growth in revenue over the past few years, it “has not shown stable profitability to justify” such an assessment, Gill noted.

Even if the company deserved to have one of the best valuations among tech stocks in terms of multiples, its shares would cost about $ 330 each, which is 24% less than current levels, the analyst added.

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