Tesla Inc (NASDAQ:TSLA) stock continues to enjoy strong momentum.
Shares of electric car maker Tesla Inc (NASDAQ:TSLA) have remained largely impervious to the ongoing turmoil in tech stocks, which continued on Friday. The Nasdaq 100 index closed lower by 0.34% on the day. The market now seems to be concerned that this year's strong rally in the FANG stocks may have pushed them into the overvalued territory. However, such bearish sentiment is absent from Tesla stock, which has rallied 75% this year, more than any of the FANG stocks, despite the fact that Tesla stock appears to be "absurdly overvalued" on all traditional metrics.
Tesla stock is currently trading at a PS (ttm) of 7.14 and a forward EV/Sales of 5.75. Even Tesla's CEO Elon Musk feels that the valuation might be stretched currently. In an interview to the Guardian, Musk had said that "I do believe this market cap is higher than we have any right to deserve," pointing to the fact that they are a money-losing company which produces just 1% GM's total output. And this was last month when Tesla was trading $315 per share. Since then it has rallied more than 15% to the current level of $370. The stock is on the way to $400.
Tesla Inc stock is in overbought zone.
Tesla recently surpassed General Motors (NYSE:GM) to become the most valuable auto company in the United States. Tesla stock is now trading 37.7% above the average price target and had recently hit the higher end of the price targets. Even technical analysis indicates that Tesla stock may be overbought. However, like we have said it in our previous posts on Tesla, it is unlikely to have any significant impact on the stock price going into Model 3 production.
Positive commentary continues to flow out for Tesla stock. Last week, analysts at German investment bank Berenberg upgraded Tesla stock to buy citing a "near monopolistic" chance to be the undisputed leader in electric vehicles. Billionaire investor Ron Baron went further ahead saying "I think [Tesla stock] is going to be $500 to $600 next year and I think it's going to be $1,000 in 2020,". Pacific Crest upped its bull case price target to $439. Analysts are even projecting scenarios where Tesla could become more valuable than iPhone maker Apple Inc (NASDAQ:AAPL).
How long can Tesla stock continue to defy gravity?
In the medium term, the stock price will depend upon the success of Model 3. If Tesla manages to stick to its production timeline and the demand doesn't see any sudden drop then the stock could rally even higher. However, any glitches in the production schedule or quality could send the stock down 20%-30%. Also, the profitability of Model 3 will be another key factor. A recent report by UBS estimates a breakeven EBIT of $41,000 for Model 3. The breakeven analysis is based on the assumption that the company will hit its production target of 250,000 this year and battery cost will fall from $190/KWH to $165/KWH, which is considered optimistic by many analysts. The $41,000 break even price leaves a thin margin for Tesla, which could come under further pressure if Model 3 manages to cannibalize Model S sales. Given Tesla's much higher operating leverage, lower volumes could result in much higher operating losses.
In the long run, Tesla's stock price will depend upon how close it gets to its 1 million production target by 2020. The company has to grow its production volume at a compounded annual growth rate of 85.7% to hit this target by 2020. It took Ford 17 years and General Motors 18 years to hit the 1 million mark. Tesla is aiming to hit that milestone in half that time. To achieve this target, the company will be relying heavily on Model 3 sales. The company has announced plans to produce semi-autonomous trucks and another mass market SUV called Model Y. But given Tesla current production capacity and resources, the new vehicles are unlikely to contribute much to the top line anytime soon.
Shorts remain adamant.
The perceived overvaluation of Tesla stock and the high risks have encouraged the bears to bet against Tesla stock. According to a research report from S3 Partners, shorts have increased their bets on Tesla stock from $8.7 billion at the start of April to $10.4 billion. However, their bets are unlikely to pay off anytime soon. Shorts have already lost around $5 billion YTD, betting against Tesla. Given Tesla stock's strong momentum, shorts may see their losses rise even higher. Overvaluation is unlikely to be a concern for Tesla bulls, at least for now.
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